Investors, faced with a structural shift in long term interest rates that will flatten and shorten the yield curve, may switch capital into higher yielding assets, triggering an equity rally, and marking the end of the two year bull run for bonds.
They invested that money in higher yielding assets across the world, from home loans in Budapest and Seoul to equities in Mumbai.
Another signal of market confidence in Italy, as traders look for higher yielding assets (especially with the speculation of an ECB interest rate cut).
This is why many have moved part of their portfolios into riskier investment companies, which can access higher yielding assets, such as shares, debt, property and infrastructure.
It has been popular to borrow yen at low interest rates and then use the money to speculate in higher yielding assets denominated in other currencies.
Banks can create SIVs by borrowing cash (by selling commercial paper) and using the proceeds to purchase loans; in other words, the SIVs sell short term debt and buy longer-term, higher yielding assets.
Hundreds of billions of dollars of short-term loans have been flowing into the country from investors in search of higher yielding assets, financing the very malls and skyscrapers that have so dismayed the small but growing coalition of secular intellectuals, left-of-center political activists and a smattering of the professional classes.
For example, individuals who are relatively risk averse tend to invest more conservatively (e.g., invest the bulk of their savings in "safe" options such as Treasury bonds instead of higher yielding asset classes like stocks).
Japanese investors have bought high-yielding assets abroad to beat the miserable returns at home.
These high-yielding assets may also produce better returns than longer-term Treasury debt if Mr. Tobias is right about the inflation outlook.
