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The investment case for Chinese banks

Government and some top-quality corporate bonds in the US, Europe and Japan now trade at negative yields. US junk bonds on average yield less than 4% for the first time in history.

The central banks’ binge-buying of securities has wiped yield out of the fixed income markets, leaving pension funds, insurance companies and individual retirees in a quandary. There’s no source of income in the market except for stock dividends and rent, and both are risky.

To paraphrase the 1930’s radio thriller, “The Shadow,” who knows what evil lurks in the hearts of equities? The market knows. At least the market brings to bear all the information that the public has (and some that it doesn’t).

Options prices are the standard gauge of market risk. If you think that a stock will move a great deal in one direction or another, you’ll buy an option. If you know something that everyone else doesn’t and want to maximize your gain, the options market is the weapon of choice.

Judging by the normalized price of traded options (“implied volatility,” or the market’s best guess about the chance of a big move in the stock price), some of the safest dividends are paid by the Chinese state-owned banks. That’s the market’s judgment, not a bank analyst’s.