Wednesday, October 29, 2008

$3.25 trillion in European bonds to hit the market next year

The Oracle found this little article on the internet and boy does it give you a glimps of what is to come here and abroad. According to the linked article, Europe will issue a total of about $3.25 trillion in bonds next year. This provids for a very interesting situation because as the market is flooded with debt, the market will suddenly become a buyer's paradise.

Why? The reason is because with so many different types of bonds in the market, investors will be able to demand higher interest rates from the issuer. Those with lower rates will simply not be bought. This is the good news for investors.

The bad news is that with so much debt in the market, some bonds simply will not be bought. There is currently a flight to safety by investors. If safety is a huge concern, why would he choose high yielding corporate debt (something we have seen completely impload in the last year with derivative bonds) when he can invest in bonds that are backed by governments?

The possible outcome of this is:

1. Some debt will not be bought.

2. Governments will also have to back corporate debt.

3. Both of the above.

The Oracle thinks that answer number 3 is probably the correct answer because if there is no safety net for corporate bonds people will simply not buy them. Governments will be forced to back corporate debt as it will give the appearance of safety. In addition, $3.25 trillion is a lot of money. That doesn't even include the explosion of debt that will be released in the US markets. There is simply going to be too much debt in the market and some of that debt will not be bought.

You got to love deleveraging.

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