In response to chaotic and falling stock markets many investors are searching for safe havens for their money. In an article by Reuters about global stocks there is an interesting note. Investors are buying national debt, Swiss franc, United States, Japanese and German bonds.
Nervous investors put more money into low-risk yen, Swiss franc, gold, U.S. and German government debt as they await more clues whether the Federal Reserve and other central banks would provide support to stabilize markets that have been roiled partly due to worries about weakening economic growth in China.
Is this a good strategy? Are Japanese, Swiss, U. S. or German bonds safe? When purchasing national debt one is betting on interest rates and on the relative value of a given currency versus other currencies. If you are going to convert U.S. dollars to Euros in order to buy German debt you want to know the rate of return you will get on your bonds and how well or poorly the Euro will do versus the U.S. dollar.
Euro versus Dollar
According to ExchangeRates.org.uk there is a downside risk to the Euro.
A strong downside euro trend continues today, after ECB President Draghi stated that monetary policy “may need to be reviewed” in the next meeting (March 2016).
Exchange rate analysts at Lloyds commented on the euro vs dollar exchange rate outlook in the near-term:
“EURUSD declined toward the bottom of its range, having printed a low of 1.0778, although it has now retraced some of this move.”
Two years ago one dollar was worth 0.74 Euro and today one dollar buys 0.92 Euro. That is a twenty percent fall in the value of the Euro versus the greenback. Why did this happen.
Interest Rates, Delayed Stimulus Measures and German Bonds
The currency rate story of last year was when the U. S. Federal Reserve was going to raise interest rates and how far. It turned out that they raised rates very little and were very clear that any further rate increases would come only when necessary. Meanwhile the European Union came to realize that using austerity measures to deal with the 2008 market collapse and Great Recession was a disaster. They realized that the better choice was the one that the USA took which was to institute strong economic stimulus measures. As the EU prints money to stimulate the economy the value of the Euro falls. Are German bonds safe? They will not be if the value of your money, versus dollars, falls as the Euro devaluates.
Negative Interest Rates
When we worried about Greece, Spain, Portugal, Ireland and even Italy going bankrupt the safest place to put your Euros was in German bonds. Unfortunately German debt briefly had a negative interest rate. In other words you paid money in order to hold German bonds. The rationale was that it was safer to pay the Germans to hold your money than to risk losing all of it by purchasing Greek bonds. Are German bonds safe? They are if you are fleeing Greek debt but not if you are cashing out of US dollars at a time when the Fed will likely raise rates again this year.
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