The latest's fear is on 4-Jun-2010, Hungarian, in Euro-zone, warns of the similar scenario of Greece's sovereign-debt, another possible default.
- Hungary's new government added to sovereign-debt fears in EU, shaking global financial markets after a spokesman for Prime Minister Viktor Orban was quoted as warning that the economy had been left in a "grave situation" and that talk of a default wasn't "an exaggeration."
- This fear may drive the European share markets for another dip;
- Definitely, the US market cannot escape from such fear too; on top of that, the unemployment status is not favorable to the market because most of the nonfarm employment in May mostly are temporary employment and private-sector hiring is still very weak;
After April 2010, the eruption of Greece sovereign-debt crisis is making investor fear of next round of US Subprime crisis.
- In currency or money market point of view, that may lead weakening of Euro currency. Investors are selling Euro and switch toward a more favorable (perhaps the next better off) green back USD;
- In funds situation, investors are liquidating out from equity funds that in turn make the fund managers sell off more shares to fill the withdrawal in equity funds. And the equity funds may have switched to bond funds for shelter;
- In equity market, after the V-shape recovery from last Mar-2009 until this April-2010, the fear of slumping in equity making investors liquidate from equity and divert into bonds for shelter too;
- Investors mostly only know what they've seen in the past 25 years, which for the most part has been a period of steadily declining treasury interest rates and rising bond prices. The fears of further losses encouraging investors divert into perceive to be safer fixed income, bonds. That in turn inflated the bond prices by investors pouring cash in at record rates;
The next possible fear is:
- What happen when the treasury interest rates are likely to increase down the road?
- With that low treasury rate for a country, by maturity of bonds, how the country is going to overcome the bonds' returns for investors which is currently higher than treasury rate compounding with inflation? That may lead to the next possible fear of snow balling effect of bonds or bubble burst of bonds in baking now;
- Bond prices are closely related to treasury rate of countries. Many countries are keeping their treasury rate low to fight against economy. The lower treasury rate favorable to bonds. That's why piles of cash are pouring into bond funds in turn forcing fund managers to acquire low-rate securities;
- However, when treasury rates move higher and the value of their bond holdings slides, in reciprocating effect, many fund investors are likely to head for the exits -- further baking in losses as managers are forced to sell to meet redemptions;
- Interest-rate hikes may be many months away, but at that point bond-fund managers could have trouble as demand for lower-yielding securities becomes scarce and prices fall.
