If a major financial crisis was approaching, we would expect to see the “smart money†getting out of stocks and pouring into government bonds that are traditionally considered to be “safe†during a crisis. This is called a “flight to safety†or a “flight to quality“. In the past, when there has been a “flight to quality†we have seen yields for German government bonds and U.S. government bonds go way down.Â
As you will see below, this is exactly what we witnessed during the financial crisis of 2008. U.S. and German bond yields plummeted as money from the stock market was dumped into bonds at a staggering pace. Well, it is starting to happen again. In recent months we have seen U.S. and German bond yields begin to plummet as the “smart money†moves out of the stock market. So is this another sign that we are on the precipice of a significant financial panic?
Back in 2008, German bonds actually began to plunge well before U.S. bonds did. Does that mean that European money is “smarter†than U.S. money? That would certainly be a very interesting theory to explore. As you can see from the chart below, the yield on 10 year German bonds started to fall significantly during the summer of 2008 – several months before the stock market crash in the fall…
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So what are German bonds doing today?
As you can see from this next chart, the yield on 10 year German bonds has been steadily falling since the beginning of last year. At this point, the yield on 10 year German bonds is just barely above zero…
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And amazingly, most German bonds that have a maturity of less than 10 years actually have a negative yield right now. That means that investors are going to get back less money than they invest. This is how bizarre the financial markets have become. The “smart money†is so concerned about the “safety†of their investments that they are actually willing to accept negative yields. I don’t know why anyone would ever put their money into investments that have a negative yield, but it is actually happening. The following comes from Yahoo…
