Drift to­wards safe haven as­sets picks up pace

The Pak Banker - - OPINION - Ira Dugal

IN­VESTORS have been ner­vous ever since the turn of the year. Af­ter a brief pe­riod of calm, volatil­ity re­turned to the mar­kets even be­fore new year cel­e­bra­tions could fade and it hasn't re­ceded since. On Tues­day, yield on the 10-year bench­mark Ja­panese bond turned neg­a­tive for the first time ever. Bond yields in Ja­pan were first driven lower af­ter the Bank of Ja­pan made a sur­prise move to adopt a neg­a­tive in­ter­est rate pol­icy on 29 Jan­uary. But even as yields have fallen, in­vestors have con­tin­ued to buy into sov­er­eign bonds of Ja­pan, per­ceived to be a safe haven as­set, driv­ing yields to zero. Bond yields and bond prices move in­versely. Es­sen­tially, this means, that if you park your money in Ja­panese govern­ment bonds, you get noth­ing for it. But that isn't de­ter­ring in­vestors who con­tinue to shun risk and move to­wards safe haven as­sets.

In a com­ment on mi­croblog­ging site Twit­ter, Uday Ko­tak, chief ex­ec­u­tive of­fi­cer of Ko­tak Mahin­dra Bank Ltd said, "Ja­pan 10 year bond yield 0. Sig­nals pro­tec­tion of cap­i­tal. Long ago I was taught that re­turn of cap­i­tal more im­por­tant than re­turn on cap­i­tal!" To be sure, Ja­panese govern­ment bonds are not the only as­set class gain­ing in the cur­rent volatile sce­nario. Most as­sets seen as so-called safe haven in­vest­ments have seen a move-up in the six weeks or so since the start of Jan­uary. For in­stance: The US 10-year bond yield has dropped 58 ba­sis points from 2.27% at the start of Jan­uary to 1.69% now. The Ger­man 10-year bond yield has fallen 41 bps from 0.63% to 0.22% now. Even left-for-dead gold has gained 12.28% from $1061.42 /oz to $1191 /oz In re­turn, risk as­sets, par­tic­u­larly eq­ui­ties, con­tinue to slide. The MSCI emerg­ing mar­ket in­dex has slipped 7% since the start of Jan­uary, re­flect­ing one of the worst starts to a new year in a while. Even de­vel­oped mar­ket equity indices haven't been spared and the US and Euro­pean mar­kets con­tinue to see re­newed sell­ing pres­sure each time a new stress point emerges. Many world mar­kets are flirt­ing with bear mar­ket ter­ri­tory, which is de­fined as a 20% fall from peak lev­els over a short pe­riod of time. Overnight, the US and Euro­pean mar­kets fell as bank­ing stocks plunged. Shares of Deutsche Bank AG fell al­most 10% in Europe af­ter credit de­fault swaps (CDS) on the bank's debt surged. A CDS rep­re­sents the cost of in­sur­ing against a de­fault on debt se­cu­ri­ties is­sued by an en­tity. Deutsche Bank led other bank stocks across Europe and the US lower and most lenders took a knock in trade on Mon­day. The global jit­ters con­tinue to re­flect on the In­dian mar­kets too. The bench­mark Sen­sex is now down 8% since the start of Jan­uary with for­eign in­vestors sell­ing a net of $1.8 bil­lion in do­mes­tic eq­ui­ties. The In­dian cur­rency, the worst per­form­ing in Asia since the start of 2016, is down 3%.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.