Bond Outlook [by bridport & cie, February 3rd 2010]
| When bond markets speak, which at some point they must, their judgement on governments that borrow to sustain deficit spending at levels never before seen in peacetime, is likely to be severe. In fact, the markets are already murmuring by, for example, granting lower spreads to some corporate borrowers than to many governments. Such murmurs are easily overlooked when low-credit bonds are still being issued and taken up at inadequate spreads, albeit at a slower rate. |
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| We have often alluded to government borrowing “crowding out” private needs. At present, virtually all Western governments are increasing their deficits, putting off serious budget balancing for as long as possible. When they can borrow at rates as low as 1%, 2% or even under 4% for ten years, their indebtedness looks sustainable. It is not. When investors begin demanding higher interest rates to compensate for increasing risk, which surely they must with so much borrowing, it will be even less sustainable. |
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| It is likely that Japan will be first to demonstrate what happens when the unsustainable finally becomes unsustained. |