"Bond on bonds - disaster ahead"
… <a href=”http://ftalphaville.ft.com/blog/2010/02/11/147641/bond-on-bonds-disaster-ahead/”>in which</a> Barcap’s Tim Bond forecasts developed market bond yields to double over the next decade. I tend to agree with that forecast, although Tim Bond and I have completely divergent reasons why.<br /><br />He thinks an aging population will cause a surge in government debt/GDP ratios, which will increase risk premia. I believe that an aging population lowers potential GDP growth and thus, bond yields as well. I believe that inflation is the one main driver of bond yields in developed markets: cf. Japan, with it’s government debt/GDP closing in on 200% (this is much higher than anything forecast for Europe and US in the next twenty years).<br /><br />However, I am much less confident that the current handling of the financial crisis will not bring a spurt of high inflation down the road. It’s not yet in the cards, but avoiding that scenario will require extreme toughness from policy makers – something I have trouble believing in.<br /><br />By the way, as I have argued in many posts in the past six months, I believe in the near term the risks to bond yields are tilted to the downside: in my opinion, there is still more risk on banks balance sheets than on sovereigns balance sheets, and renewed flights to quality cannot be dismissed. For now.<div class=”blogger-post-footer”><img width=’1′ height=’1′ src=’https://blogger.googleusercontent.com/tracker/3043548435115956173-8088174948135907584?l=raphaelkahan.blogspot.com’ alt=” /></div>
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