Consider the situation from the point of view of those who look after these large pools of savings. These funds must be parked somewhere and, given the current state of mind of their beneficial owners, safety is prized more highly than the level of return. The corporate sector, its balance sheets stuffed with cash, has little requirement to borrow and the financial sector, once a deviser of all sorts of clever instruments that delivered triple C yields with triple A ratings, is no longer quite so creative.
The obvious strategy is to lend the money, however unenthusiastically, to the government. Investors need not lend money to all governments. A small country such as Greece, which combines a high level of debt with a sorry record of obfuscation, can be quite easily deleted from the list of suitable investment targets.
But when one comes to the major government bond markets – Treasuries, JGBs, Bunds, even gilts – it is unclear that investors have quite the same freedom. They have to put the money somewhere. All these bond markets – fiscal concerns notwithstanding – have been remarkably strong.
Jonathan Allum, “The lessons to be learnt from Japanese bonds”, Financial Times, 31 August 2010.
Jonathan Allum is Chief Japan strategist at KBC Asset Management in London.
