So far in 2016, according to the Financial Times, there have been a record number of downgrades to sovereign debt. Fitch and Moody’s have downgraded the credit ratings on 14 nations, while S&P cut ratings on 16 nations.
Normally, when the credit rating of a person, a company or a government declines, the interest rate they have to pay to borrow goes up. So, lower credit should mean higher interest rate yields, right?
But, today that’s not always the case, especially in developed nations, see the chart below.
Central Banks around the world are manipulating the system. Central banks are engaged in a currency war, arbitrarily setting short-term interest rates at record lows, and flooding the financial markets with Dollars, Euros and Yen.
There is about $48 trillion in advanced economy sovereign debt and about $13 trillion of that is trading with negative interest rates. Think about it: that means bond buyers actually pay nations to buy their debt instead of getting paid interest! Who would do that? Buyers of over ¼ of sovereign debt, that’s who.
Why would they do that?
There is much uncertainty in the World today. Countries and regions are not growing like they were three years ago, and many are actually in technical recession. The more uncertainty in the world economy, the more investors pile into the safety of sovereign bonds of those countries they believe to be safest, and the more yields on those bonds are pushed even lower.
Meanwhile, for other countries perceived to be in really bad shape, the worse the credit quality, the higher the yield – just as you would expect.
Some content from Lance Gaitan’s July 25th email, including first chart.
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