Is Mario Draghi Stupid, Crooked Or What?
Europe is surely at the top of the heap among today’s raging financial market lunacy. It seems that Ireland has now broken into the negative interest rate club, investment grade multinationals are flocking to issue 1% debt on the euro-bond markets and, if yield is your thing, you can get all of 3.72% on the Merrill Lynch euro junk bond index.
That’s right. You can stick your head in a financial meat grinder and what you get for the hazard is essentially pocket change after inflation and taxes.
Remember, the average maturity here is in the range of 7-8 years. During the last ten years europe’s CPI averaged 2.0% and even during the last three deflationary years the CPI ex-energy averaged 1.2%. So unless you think oil prices are going down forever or that the money printers of the world have abolished inflation once and for all, the real after-tax return on euro junk has now been reduced to something less than a whole number. Has the reckless stretch for “yield” come down to this?
Well, no it hasn’t. Yield is apparently for suckers and retired school marms.
This is all about capital gains and playing momo games in the bond markets. It’s why euro junk debt—-along with every other find of sovereign and investment grade debt—-is soaring. In a word, bond prices are going up because bond prices are going up. It’s an utterly irrational speculative mania that would do the Dutch tulip bulb punters proud.
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