QUESTION: Why are long-term yields on risky European debt below that of US Treasuries? Is this the European bubble madness?
HN, Frankfurt
ANSWER: This is unquestionably a bubble, but the buyer has been the ECB (European Central Bank). Yields on risky European bonds have been driven below the yields of long-dated US securities. The financial system may appear to be riddled with anomalies, distortions and erroneous prices, but all of those labels assume it is the madness of crowds rather than the government. Mario Draghi has created the worst possible financial nightmare perhaps in modern history since governments began borrowing in the 12th century. These are not driven by a free market, but one that is manipulation of a central bank gone absolutely mad.
The average return on European junk bonds is below “risk-free” US government bonds. This is completely driven by the insanity of the ECB. In fact, Draghi purchased around $ 2.6 trillion in securities since his Quantitative Easing began in March 2015. He assumed that this would stimulate the economy. However, all it has done is kept the member states on life-support. He is trapped and has no way out, which is why he has come out and said that the ECB will reinvest when the bonds they hold mature. There will be no end to this madness and he has single-handedly wiped out the bond markets. There is no free-market remaining so the question becomes – how will governments ever sell its debt in the future?
