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Originally Posted by SnerpGoodWord  I'm guessing you've never actually tried this, have you? The theory of positive carry "makes sense" economically, but it doesn't actually work in many environments. It assumes that investors will prefer the high default-adjusted yield of the bonds of crisis countries over the perceived safe haven properties of bonds separate from the crisis. That may be economically rational, but it's not what happens in many cases - witness Japan's bonds in the "lost decade" and Swiss bonds during the current Euro-crisis.
The reason for this counter-economic behavior is that most investors (basically, pension and bond fund guys) have a skewed set of incentives. The incentive to grab more yield is much smaller than the disincentive in the case of default. If a pension fund takes on default risk, they get an ulcer and an "attaboy" from the boss for making a few extra percent when it works. When the bonds default they get fired. As a result, apparently attractive carry situations can sit there with no takers for years or even decades. |
Not sure what your point is. In what sense is this relevant?