Tuesday, July 26, 2005

Carry trade again

What we donĀ“t see
So far, the Euro carry trade has mostly benefited the European government bond market. To us, this seems unlikely to continue. And this for a simple reason: either European economic growth starts to accelerate, in which case borrowing Euros to buy European equities (especially exporters) makes sense and owning government bonds does not. Or European economic growth deteriorates, in which case questions will start to be raised on the ability of European government to meet their obligations; if of course, European governments don't decide to abandon the Euro experiment even before the market forces them to!