Returns for holding sovereign bonds – that is, debt issued by countries – have plumbed all-time lows in recent weeks as investors fret over the outlook for the global economy and turn to the perceived safety of fixed income products.

Bond prices – which move inversely to the yield/return on the bond – are widely thought to be in an unsustainable bubble because they don’t provide enough return to justify buying them in the first place.

“We’re in a situation where people are buying bonds in the expectation that they will rise in price and they can then be sold on to another buyer,” said Monica Freeman, chief markets strategist at Monex Financial. “Right now, in the case of debt issued by European governments, that buyer is the European Central Bank which is creating money to buy up debt from commercial banks in order to stimulate the economy.”

Both the ECB and the Bank of Japan have committed firmly to the policy of negative interest rates which have depressed yields further and fears are growing that the next financial crisis could be caused by imbalances in the pricing of risk for entire nations.

Monex Financial says it sees no reasonable explanation for the 10 year bonds of countries like Italy and Spain offering yields only slightly higher than those of what many consider to be the ultimate safe borrower Germany.

“The 2008 global financial crisis had its roots in the mispricing of risk on subprime mortgage debt. The next crisis could be because of the mispricing of risk on sovereign debt,” concluded Freeman.

About Monex Financial
Monex Financial is a privately held, fully independent investment and wealth management leader, with retail operations based in Toronto, Canada and corporate trading division headquartered in Tokyo, Japan.

From our offices in Toronto the capital city of the province of Ontario and financial and business capital of Canada, we serve private individuals and families from N. America to Europe and with our corporate trading division strategically located in Tokyo, Japan, we have unrivalled access to Asia’s high yielding emerging markets, access to corporate resources, private equity and global mergers and acquisitions.