People rush for government bonds, but experts fear they will become part of the problem

The earnings on government bonds dropped down this week. The investors are afraid of the recession and that is why they started to buy so many government bonds. They rather prefer safe investments than shares at the moment. Because of the recession, the inflation reduces and that is what makes bonds more attractive.
This is very good news for the governments, they receive a lot of money to help the economies and financial institutions.

But there is also a negative side. George Buckley, economist at Deutsche Bank, said that the amount of bonds sold has almost doubled. He wonders if the government will be able to offer an attractive yield for them, so that the buyers will still be interested. This rising demand causes an increase of the prices which has its effect on the yields. If the price becomes higher, the yield drifts down. This is often a sign of recession.

For instance the British yields are under constant pressure because of the negative results of certain important sectors, such as the construction and manufacturing industry.
A second example are the 10-year Treasury yields of the US. They plummeted to the lowest level in 50 years, the most important reason is the recession.

Experts and economists fear that the yields will continue to slip back as the whole world goes into a recession.

Alistair Darling revealed in a budget report that he wants to lift up taxes and cut the spending growth. He gave the indication to the markets that he won’t allow the government’s largesse to last for a long time.
But analysts doubt the fact that the markets are convinced. Investors worry about the risk the government might take by have so much debt, that they could have problems paying the interest on the bonds.


I can agree with the investors that they choose for a safe investment at the moment. I would also be more cautious and buy more bonds then before the crisis. Although, I think that now is the moment to buy shares of certain companies.

For the governments it is indeed a good situation that the bonds have so many success. They receive a lot of money which can be used to restore the economy.
But I think that they have to be careful and not sell too much bonds. Because if they do that, their debts will become too high and the governments will get into problems themselves. That is the last thing we want to happen right now.

I hope that Mr. Darling is right and that he does what he said. Then the markets can become confident again, which is necessary for them in order to restore and become healthy. Without it, the crisis won’t be solved!

Source: The Guardian - People rush for government bonds, but experts fear they will become part of the problem -
http://www.guardian.co.uk/money/2008/dec/04/government-bonds-investments