by David Cottle
Wall Street Journal
November 25, 2011
The dominance of an overarching ‘risk trade’ has been perhaps the most prominent feature of capital markets ever since the debt crisis moved from being a banking problem to one of sovereign debt.
On one side there are things like equity and the euro. They’re highly correlated and charge higher on the increasingly rare days when investors have some hope for the future. German government bonds have been part of a select group of assets on the other side of the trade: in demand when investors want low-risk parking slots for their money.
The group includes U.S. Treasurys, U.K. gilts, the yen, Swiss franc and gold. Risk aversion took both yen and franc to such heights that their central banks are busily attempting to keep financial refugees away with the threat of vast selling. Now Wednesday’s shocking bund auction has raised the odd doubt about German debt’s membership of the club.
After all, if Germany can’t sell nearly 40% of the bonds it offers, it seems that investors are having a little rethink about their position as the safest of the safe. However, it’s likely that bunds will in fact be staying put close to the top of the ‘risk off’ pile.
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