Investment banks have recently started to question the integrity of the US treasury markets (bond bubble). By comparing their current price points (which are particularly high given the state of their economic context) and the imbalance between the risk and reward associated with their potential ability to continue creating returns over the years, investors have started to look at how alternative ‘risk-free’ government bonds are faring in the global markets, and how they can be used to diversify a portfolio out of just US securities.
By comparing the yields of 10 year government bonds from ‘safe’ countries around the world against their respective risk exposures, we can get a better idea of what our investment options are compared to a 10 year US bond.
Because of the way the US bond market is coming into question as a result of its exposure to currency inflation, we can start our evaluation by looking at how comparable bonds represent their own currency risks, and how those two risks either complement or offset each other. For example, Singaporean bonds denominated in the USD are actually yielding 0.068% less than the USD, suggesting that investors are placing a premium on these bonds, even though they are exposed to inflation under the same currency.
Alternatively, we can see how it is that Germany, the European safe haven, is currently priced in at 0.268% less than the US bond, despite the fact that it is exposed to the dramatic risks associated with a breakup of the Euro-zone, or a bail-out campaign (which would result in an inflationary campaign to bail out failing countries). Regardless, it is interesting to notice how each of these situations seems to carry a premium against the US bonds, suggesting that investors are still more comfortable holding them!
Having looked at the way in which countries exposed to inflationary risks seem to favor currencies besides the USD, we can now start to look at some more obscure securities that would price in different kinds of risks, without direct exposure to the USD or the Euro-zone. Specifically, we can look at how it is that Sweden and Denmark both show an even higher premium against US bonds (0.32-0.5% respectively). What’s interesting to notice about these distinct situations is then how they compare to the risks of the previously mentioned nations.
Specifically, while Sweden and Denmark are not at the point of default (as is occurring with the Euro-zone, which would potentially implicate Germany), they are considered to operate as highly leveraged societies, suggesting that they might be at risk of at some point going into default. However, because they have not yet hit the point of break-down (as the US did in 2008, or as Europe is hitting right now), they carry a premium against other currencies, and therefore are considered to be safer holdings by the market, at least for now.