Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Gold and Silver - The Two Horsemen - 11th Nov 19
Towards a Diverging BRIC Future - 11th Nov 19
Welcome to the Zombie-land Of Stock Market Investing - 11th Nov 19
Illiquidity & Gold And Silver In The End Game - 11th Nov 19
Key Things You Need to Know When Starting a Business - 11th Nov 19
Stock Market Cycles Peaking - 11th Nov 19
Avoid Emotional Investing in Cryptocurrency - 11th Nov 19
Australian Lithium Mines NOT Viable at Current Prices - 10th Nov 19
The 10 Highest Paying Jobs In Oil & Gas - 10th Nov 19
World's Major Gold Miners Target Copper Porphyries - 10th Nov 19
AMAZON NOVEMBER 2019 BARGAIN PRICES - WD My Book 8TB External Drive for £126 - 10th Nov 19
Gold & Silver to Head Dramatically Higher, Mirroring Palladium - 9th Nov 19
How Do YOU Know the Direction of a Market's Larger Trend? - 9th Nov 19
BEST Amazon SMART Scale To Aid Weight Loss for Christmas 2019 - 9th Nov 19
Why Every Investor Should Invest in Water - 8th Nov 19
Wait… Was That a Bullish Silver Reversal? - 8th Nov 19
Gold, Silver and Copper The 3 Metallic Amigos and the Macro Message - 8th Nov 19
Is China locking up Indonesian Nickel? - 8th Nov 19
Where is the Top for Natural Gas? - 7th Nov 19
Why Fractional Shares Don’t Make Sense - 7th Nov 19
The Fed Is Chasing Its Own Tail; It Doesn’t Care What You Think - 7th Nov 19
China’s path from World’s Factory to World Market - 7th Nov 19
Where Is That Confounded Recession? - 7th Nov 19
FREE eBook - The Investment Strategy that could change your future - 7th Nov 19
Is There a Stock Market Breakout Ahead? - 6th Nov 19
These Indicators Aren’t Putting to an Economic Resurgence - 6th Nov 19
Understanding the Different Types of Travel Insurance - 6th Nov 19
The Biggest Gold Story Of 2020 - 6th Nov 19
Best Money Saving FREE Bonfire Night Fire Works Show Sheffield 2019 - 5th Nov 19
Is the Run on the US Dollar Due to Panic or Greed? - 5th Nov 19
Reasons Why Madrid Attracts Young Professionals - 5th Nov 19
Larger Bullish Move in USD/JPY May Just Be Getting Started - 5th Nov 19
Constructive Action in Gold & Silver Stocks - 5th Nov 19
The Boring Industry That Hands +500% Gains - 5th Nov 19
Stock Market Chartology vs Fundamentals - 4th Nov 19
The Fed’s Policy Is Like Swatting Flies with Nuclear Weapons - 4th Nov 19
Stock Market Warning: US Credit Delinquencies To Skyrocket In Q4 - 4th Nov 19
Stock Market Intermediate Topping Process Continues - 4th Nov 19
Stock Market $SPY Expanded Flat, Déjà Vu All Over Again - 4th Nov 19
How To Buy Gold For $3 An Ounce - 4th Nov 19

Market Oracle FREE Newsletter

How To Buy Gold For $3 An Ounce

Flight to safety does not equal flight to German Bunds Anymore

Interest-Rates / Credit Crisis 2011 Jan 06, 2011 - 06:14 AM GMT

By: ECR_Research


Edin Mujagic writes: Mention the words ‘euro area’ and ‘periphery’ and immediately almost everyone will associate that with troubles, strikes, indebted nations and rating downgrades, to name just a few flattering possibilities.

But wait, since when is the term ‘periphery’ reserved for southern and western edge of something or some region? How about north and east? Indeed the prominent Oxford English Dictionary describes ‘periphery’ as ‘the outer limits or edge of an area or object’, meaning all sides. So, overwhelmed with stories in the media on the economic and financial troubles in euro area periphery, one easily, but incorrectly, sees the periphery as a place you definitely do not want to be (or want to be associated with, as was recently shown when politicians from Ireland/Portugal/Spain bent over backwards to ensure investors that their country is no Greece/Ireland/Portugal.

Euro area periphery is much more than Greece, Portugal, Ireland and Spain and also includes the likes of the Netherlands, Finland and Estonia. 

Estonia boasts by far the smallest debt of the euro area and does not even issue government bonds (leading to some technical difficulties at the statistical department of the European Central Bank where you can find long term interest rates for all euro and non-euro countries, except for Estonia where ‘no suitable long-term government bonds available on the financial market’ says the ECB. The central bank in fact had to invest some interest rate indicator in order to have some data on Estonia in the table.) Finland has a long history of budget surpluses during the last decade and the Netherlands have had reasonably healthy government finances as well.

When we talk about that kind of periphery, that is the region you definitely do want to be.
Recently, two investment funds (together they oversee just little over 520 billion USD) have done just that. Legal & General Investment Management and Frankfurt Trust are looking towards the Dutch and Finnish state loans for safety.

Both the Netherlands and Finland boast the highest rating possible, Triple A, just like Germany. But the difference between the two smaller countries and Germany is that Germany is and will increasingly be the main financier of the rescue of the troubles euro area countries. Germany is so to speak the ultimate guarantee of the euro area. That ‘honor’ comes at a huge cost, in any case much higher than the cost for the Netherlands and Finland. With every new rescue operation, German Bunds are likely to be seen as a less and less safe haven. Given the fact that the future of the euro is, in the best case, destined to be uncertain and full of new troubles, German Bunds will most likely lose a lot of appeal they currently have.

How could investors profit from all this? Buying Dutch and Finish bonds is likely to earn some money, but it would not be much, given the already low interest rates. If instead of yield you are looking for safety, then the story changes a lot of course. In that case, those bonds are the way to go and even to prefer over Bunds over the medium to long term.

What could make a handsome profit though is shorting the bonds of the other periphery countries in the euro area (and for real daredevils with a long term strategy, shorting the Bunds). They seem destined to fall in price, both in the near and in medium to long-term future.

Another option is to step out of the euro area but not venture very far as the same time. Given the fact that Swedish bonds are on the same footing as the Dutch and Finnish ones, it is likely that the Swedish krona will gain ground against the euro. So opening a savings account in Sweden and just waiting could earn some serious profits by doing virtually nothing or in any case not much. Obviously, there is uncertainty about the outcome and various risks that have to be considered.

Edin Mujagic, monetary economist at

ECR Research ( is one of Europe’s leading independent macroeconomic research institutes focusing on the main currency and interest rate markets. The ECR reports reach a worldwide audience of sophisticated investors and treasurers and CFO’s within corporations and financial institutions. ECR offers a wide range of research products which are online accessible and updated on a weekly basis.

© 2010 Copyright ECR Research - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules