We saw a remarkable market statistic this week — 1.12%.
This is the yield German 10-year government bonds (known as bunds) dropped to this week. If you disregard the abnormalities that occurred in the German economy after the First World War, this qualifies as a 200-year low.
But more than being just a measure of how much faith markets have in Germany, it represents a compilation of many of the events that happened in the financial world this week, particularly more risk, and the resulting flight to quality assets like bunds.
Early in the week, we got word that the European Union joined the U.S. for a round of sanctions against Russia of a punitive nature not seen since the end of the Cold War. This can potentially present a risk to a European economy that remains dependent on Russian oil and trade. The escalation of the violence between Israel and Gaza always holds the potential to spark more conflict in the Middle East. Investors were eager to find a safe haven for capital, and many started buying bunds, helping to drive down yields even more.
The same flight to safety was exacerbated when Argentina defaulted on some of its sovereign debt this week after a long, protracted battle with certain bondholders holding out in debt restructuring negotiations. This is a country famous for being a graveyard for investors’ hard-earned money, but memories in finance can be very short.
The event that seemed to run counter to the low-yield theme this week was the release of U.S. Q2 GDP, which beat expectations dramatically. That did result in a flight from U.S. 10-year Treasuries, which have been the subject of a great deal of head scratching all year as to why their yields are so low.
Our View: This was a week of decidedly mixed news and will take some time to sort through. On net though, it was a week that reminded us that we still live in a risky and dangerous world.
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