No flight from risk just yet

By wpcomimportuser1 | June 26, 2007 | +

John Authers in the FT makes the point (subscription required) that the great flight from risk that people with respect for market history have been predicting for a while now still hasn’t come to pass:

Angela Montero, of Société Générale, pointed out last week that Mexican bonds yielded 5.85 per cent. 10-year bonds in Colombia, gripped by scandal and guerrilla war, yield 6 per cent. US treasuries yield only about 5.15 per cent, but, more tellingly, New Zealand and Australian bonds yield 6.2 and 6.75 per cent respectively.

This is in local currency terms, and speculators have pushed the aussie and kiwi dollars to excessive levels. But can Mexico or Colombia really be a safer bet to repay a loan than Australia or New Zealand?

My thinking is that they can’t. But every week there seems to be another sign that the global age of easy money that has brought us these weird interest-rate relationships is about to come to an end and then … it doesn’t.

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p_lukasiak

My thinking is that they can’t.

of course they aren’t. But risk isn’t just a question of paying back a loan, its what that loan’s anticipated future value will be in the international monetary markets.

And right now, the currencies of Australia and New Zealand are considered “over valued”, and an eventual adjustment downward is anticipated which will result in lower returns relative to other currencies.

The other thing is that everything is now hyper-short term. Its not as if people who buy 20 year bonds issued by Columbia are stuck with them for 20 years — and supposedly the people who buy and sell these securities are paying enough attention to places like Columbia to minimize their potential losses….

and as we’ve seen with Bear-Stearns, brokerages are more than willing to protect wealthy individuals and banks who make risky investments by tranferring losses on high risk investments to low risk investments.

But you already know all this, don’t you?
Justin Fox

I guess I sorta knew it. But you put it so well.

As for this: >>brokerages are more than willing to protect wealthy individuals and banks who make risky investments by tranferring losses on high risk investments to low risk investments