Financial lifeboats starting to get crowded

August 12, 2011

By Agnes T. Crane
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

The financial lifeboats are starting to get crowded. Investors in droves have sought safety in Uncle Sam’s debt, and even bonds backed by American homes. But on Thursday, vessels of refuge showed how quickly they can be rocked when too many investors pile in.

Swiss authorities had already signaled their displeasure with excessive interest in the local money last week when they cut interest rates to zero. Yet investors, prodded by ultra-low rates in the United States, kept buying. More stringent measures would be needed to hold off the masses, and media reports about possibly linking the soaring franc to the wobbly euro managed to send the Swiss currency tumbling.

Gold bugs also were abated, if perhaps temporarily. CME Group CME.O, the U.S. operator of derivatives and other exchanges, ramped up margin requirements for gold futures to slow the stampede. As a result, the ultimate escape for doomsayers, inflation hawks and speculators alike watched the price of their precious yellow metal fall more than 3 percent at one point on Thursday.

U.S. debt and government-guaranteed mortgage bonds have also seen an influx from investors trying to navigate the current storm despite the country’s loss of its AAA credit rating. The 10-year Treasury note was yielding as little as 2.17 percent on Thursday morning, 1.56 percentage point lower than its 2011 peak.

Bonds backed by U.S. home loans also got a massive lift this week when the Federal Reserve indicated it would keep funding costs extremely low for two years. That locks in easy, and seemingly safe, profit for those borrowing short and investing long. It’s no wonder investors aren’t feeling much buyer’s remorse given that yields are much lower than inflation, running at 3.6 percent on an annualized basis.

There’s of course a difference between speculative bubbles caused by greed and psychological ones born of fear. But so-called safety trades can blow up much the same way as risky ones. It’s just that policymakers, rather than the invisible hand, are the more likely holders of the pin.

Changing currency pegs in Switzerland, allowing the yuan to appreciate in China or ongoing bullheadedness in Washington could make today’s emergency rafts look less seaworthy. Worse, if inflation turns out to be the real threat, investors may find themselves paddling feverishly to change course.


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How much for a burger in Zurich vs. LA?

Posted by robb1 | Report as abusive

If this uncertainty event doesn’t not come to the end, i thinks we should create the ark, soon asposible. Unless, majority rich nation such an USA, create financial crack down (domino effect).

Posted by Noah_ark | Report as abusive