Financial Markets
Essay Preview: Financial Markets
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Central banks are the biggest players in a lot of countries where the government-bond markets are large. Over the past years, it has been observed that the equity markets appreciate only when the central banks increase the money supply by means of bonds. The banking system has become reliant on governments support.
The bond markets are highly influenced by the interaction of central banks. The future level of short-term rates influences bond yields.
The interest rates on bonds are being kept at all time low levels by the central banks of USA and Europe. These rates are expected to be at low levels till 2014.
Due to the economic havoc in the PIGS (Portugal, Ireland, Greece and Spain) in Europe, the investors are taking out their investments from the bond markets of these countries and are investing in safer options. For this reason, Germanys bond interest rates are at all time low.
Since, there are only a few investors who are willing to invest in the bonds issued by Spain, the interest rates of the Spanish bonds shot up to an all time high.
Similar trends are being observed in the US bond markets. For eg. the US 10 year yields have fallen below 2% as the investors are pulling their money out of the PIGS and investing in these countries.
In Britain, the government is selling bonds at historically low rates. The maturities of these bonds are also twice the length of those routinely sold by other European countries. The average maturity length is already over 10 years, and the government is routinely selling 30 and even 50 year bonds to investors. Britains debt management office has begun discreet and informal discussions with the markets about issuing “super-long” gilts, by which the Treasury means at least 100 years, and possibly “perpetual gilts”.
The Britain government is keen to rebalance the nations debt portfolio. Thus, they are taking advantage of the relatively solid credibility Britain currently enjoys among bond traders and analysts.