With governments of the world essentially guaranteeing most banks, why is there such a discrepancy between the yields of their bonds?

Riz Din writes:

I'm equally beat by this. Surely, no bank with a large government stake in it will be allowed to fail. Has such a thing ever happened before? Furthermore, even if such a possibility exists, why not simply buy in to the new class of bank bonds that comes with shiny government guarantees specifically written in to them [under the Brown plan ]. It looks like US banks may be holding back from issuing these new government-backed bonds until they get more clarity on the details, and an unintended consequence of the delay could be that it discourages buyers of existing bonds. But issuance of these bonds is already under way in the UK though, with Barclays and HBOS offerings already in the market (see FT link), and even these short-term bonds that piggy-back off the government's solid credit rating offer around 14-15% yield. Are we missing some pieces of the puzzle here - perhaps in the small print - or are these bonds simply extremely good value?

Nigel Davies responds:

Well, the Icelandic government was propping up Kaupthing Singer and Friedlander before they got screwed by our beloved leader when he used anti-terrorism laws to freeze the assets. Looks like I won't be playing chess there in the near future. And now, whenever I see government backed stuff being touted as '100% safe' the hairs on the back of my neck stand on end.

So is anyone for some Icelandic government high yielders? If not then my take on it would be to short some government backed debt whilst going long the debt of some of the institutions it's supporting. Which country? Probably the one we're stuck in right now.

GM Davies is the author of Play 1 e4 e5: A Complete Repertoire for Black, Everyman, 2005


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