Sovereign Debt Distortions

Watt: How's it feel to be carrying all that cash in your pocket?
Keith Nelson: Well, a little uncomfortable.
Watts: Want me to tell you one more time that I think you're crazy?
Keith Nelson: Nope.
Watts: Been hording that cash for years?
Keith Nelson: Yep.
Watts: How bad's your dad gonna ream you?
Keith: You won't be able to measure it with existing technology.
--Some Kind of Wonderful

On the back of yesterday's post about the inverting UST yield curve, some eyebrow-raising anomalies among sovereign debt yields worldwide help explain what we're seeing in Treasuries. Here are some rates on various 10 yr country bonds per WSJ as of this pm:

US   2.243%
UK  0.900
Sweden   0.005
Spain   0.765
Portugal  0.863
Netherlands   0.021
Japan   -0.081
Italy   2.651
Germany   -0.171
France   0.242
Belgium   0.320
Australia   1.543

Only two countries besides the US sport rates above 1% (!). Many are close to zero. In fact, yields on 10 yr German and Japanese bonds are negative, meaning that creditors are effectively paying debtors for the privilege of owning the paper.

What is going on? It's the global version of 'quantitative easing.' Central banks, namely the BOJ and ECB are buying sovereign debt in an effort to keep rates low. Interest rates on bonds go down when prices go up. As central bank buying programs bid up the prices of sovereign debt, yields shrink globally.

Although they may be difficult to measure with existing technology, the market distortions wrought by this activity help explain what is going on here in the US. If you are on the market for 10 yr sovereign bonds, which country offers the best risk:reward prospects?

As investors vote with their wallets, they are buying US tens in size, which is pushing their rates lower than would be the case in unhampered markets.