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George Magnus, former chief economist and current senior economic adviser at UBS, says in a Financial Times op-ed that hedge funds betting against German bonds have pretty big hurdles to clear for a trade like that to work.Magnus think German bond yields will remain low and prices will remain high for a while.
He writes that those positioning for a “big short” in German bonds must either believe that Germany won’t go the way of Japan or that EU politicians will actually be able to effect some sort of positive policy change.
On the prospect of Japanification of Germany, Magnus writes that low Bund yields are here to stay:
Germany, also a creditor, external-surplus nation, with a deleveraging banking system may be no different. In some ways, German bonds look to be a better risk than Japanese government bonds (JGBs)…The German government’s gross sovereign financing needs are roughly 10-11 per cent of gross domestic product in 2012-13, compared with 58 per cent in Japan. Germany’s current account surplus is bigger, its nominal gross domestic product is still rising, and it is some way behind Japan in the demographic shift.
The relentless fall in German yields from the 1990-91 peak of nearly 9 per cent following unification may be largely over. But the fleeting increases in the 2009-2010 global economic recovery, and in 2010-11 as bailout packages for Greece, Ireland and Portugal were agreed, were not sustainable. The JGB lesson is generational lows in German bond yields are structural, not a valuation freak.
Magnus is also not too hopeful for political progress in the eurozone ahead of a summit of euro area leaders this weekend. “By now, we know well how to fix the eurozone, but the political will to do so remains elusive. Even if the fiscal compact is pretty much done pending ratification, Europe needs an immediate change in the behaviour and operating remit of the ECB and ESM,” he writes.
Read more at FT.com.
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