The decision by the leading credit rating agency Standard & Poor’s to cut Greek debt to junk and reduce the sovereign rating for Portugal sent investors scurrying to the safer havens of UK gilts, German bunds and US Treasury bills.
This so-called flight to quality will have a limited shelf life. Let's leave aside for a moment the risk that German bond yields may eventually spike the more Germany entangles itself in an EU bailout of Greece. That might be mitigated if near-term German elections bring new leaders to power who can scuttle such a bailout.
The U.S. and U.K. have massive debt problems of their own, but the relative unattractiveness of other sovereign bonds artificially keeps up demand for gilts and Treasuries. That relative advantage is temporary. The sovereign credit problems facing the Anglo-West are not lost on the Chinese, who have discovered that they must raise interest rates to clear their bond inventory.
I would not want to be in the Fed Chairman's seat when he comes to the inevitable point of raising rates.
Full disclosure: No positions in U.S., U.K., German, or Chinese bonds at this time.
