The Germans have been perceived with a cautious eye by the rest of Europe. Today isn’t an exception to this rule. Together with the likelihood of France, Italy and Spain joining Greece and Ireland in requiring the help of the European bailout mechanisms, primarily backed with German contributions, the possibilities of a German exit from the distressed currency union is growing. So, just how do you protect assets in the event of this sort of chain of events?
With US Ten year Treasuries vacillating between sub 1.5 – 1.6% yields, international investors will likely continue to seek out that investment as being a possible replacement safe haven to the German 10 Year Bund, which is appreciating continuously since hitting record lows close to 1.2% just a few weeks ago. Because the Economic headlines continue to deteriorate, plus the prospect of a sudden convertibility crisis between future former Euro Zone currencies becomes a specter on the horizon, the most effective bet could be the US Dollar, despite 10 Year yields at currently low rates.
While there may not be remarkable upside to yields, the coupon values of US Treasuries are basically the only asset which has a certain upside thanks to the Federal Reserve’s statement last week that it will continue to sell short-term notes favoring acquiring long term notes. Compound the recent events of Spain’s second request for assistance and climbing yields on debt throughout the Euro Zone and the diminishing of alternate options is proving to be the only method investors can protect assets within this unstable climate. Policymakers both in the United States and Europe have to face escalating deficits, deteriorating economic conditions, and increasing unemployment, consequently they’re planning to borrow just as much as they can for so long as they can.
In the US, the Supreme Court’s final decision on the Arizona Immigration law, as well as the landmark case on the Affordable Care and Patient Protection Act have taken some of the emphasis from last week’s downgrades by Moody’s of 7 of it’s biggest financial institutions. Direct impacts on the money market funds that depend on investment grade issuance by the same institutions have not yet been felt, but are lurking down the road. The most effective financial advice for those trying to preserve capital from the prospect of low yields, and overly-risky investments is to keep resources in cash or 10 year notes for the next 3-6 months, or prior to the end of year when sequestration is planned to begin.
If the Germans determine that the Euro is not worth the excessive price tag they have invested in, the likelihood of further appreciation of the dollar compared to all other foreign currencies ought to alarm anyone with commodity or risk based investments. The chances of Germany’s exit are increasing with every passing day of inaction by troubled states to reign in spending. As the risks weigh on the financial sectors and European lenders remain unwilling to invest in sovereign debt and private institutions in other European states, there will remain a robust demand for US debt.
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