Europe’s fifty year bonds signal decades long slump –

8 months ago Comments Off on Europe’s fifty year bonds signal decades long slump –

Of all the investment oddities to have emerged from the post crisis world, one of the weirdest yet is the advent of the 50 year, or even 100 year, government bond.

Once upon a time, it would have been thought a sign of madness even to suggest a security of such extraordinarily long maturity.  But that was before the “new normal” of seemingly never ending zero interest rates and ultra-low inflation set in, and now everyone’s at it.

Spain, France and Belgium, have already successfully launched 50 year bonds this year, and now even Italy, which on any objective analysis is effectively bust, is going to have a go too. Interest in Italy’s bond is said to be “healthy”.

What does all this issuance of ultra-long bonds tell us? One explanation is that investors have simply made up their minds that Europe has become Japan, and is therefore destined for a decades long deflation.

There is plenty of evidence for such a long term Western malaise, even from the US, where with companies unable to find profitable opportunities for their cash generation, share buy-backs have reached record levels. If a CEO cannot generate any top line growth, he can at least massage the bottom line, and therefore his bonus, by shrinking his share capital.

Where there’s no opportunity for growth, investors will seek out the lowest risk alternatives for their money. Government bonds, where risk of default is low to non existent, are the home of choice.

In such circumstances, any apparently “risk free” yield of more than 2pc looks like a bargain, and the thing about a very long term bond is that it will carry a slightly higher coupon than one of shorter maturity.

Another explanation is that whether Italy, with public debt of more than 130pc of GDP and rising, is bust or not, creditworthiness no longer matters, since all eurozone debt is now effectively underwritten by the European Central Bank. The moment Mario Draghi, the ECB president, said he would do whatever it takes to save the euro, he effectively signaled to investors that countries would not be allowed to become insolvent. Debt would be monetised instead.

But perhaps the most depressing message is this. Desperate for yield, investors are venturing way beyond the horizon of central bank bond buying programmes, where nominal returns have already been depressed to virtually zero, out into the indefinite future.

In their conceit, governments like to think that appetite for such long term bond issues is a mark of confidence in their own economic brilliance. In fact it is precisely the reverse; it is a sign that investors have lost their appetite for risk, and rightly or wrongly, resigned themselves to a world of nil growth for a decades to come.

But fifty years? That’s a long time for inflation and interest rates to remain so low. Eventual losses are all but guaranteed.

Rudd versus Leadsom

It is all sweetness, light and sisterly love round at the Department for Energy and Climate Change (DECC) these days, so much so that Amber Rudd, the Energy Secretary, and her Energy Minister, Andrea Leadsom, are said, er, to have fallen out so badly that they are no longer on speaking terms.

It’s that wretched Brexit thing again, I’m afraid. Sadly, the two find themselves on different sides of the fence, and to the dismay of their officials, giving polar opposite speeches on the implications of leaving the EU for the UK’s energy needs.

Ms Rudd, you won’t be surprised to learn, thinks the lights will go out if we leave, whereas Ms Leadsom thinks they’ll go out if we don’t. By my reckoning that means they are going out either way, which, come to think of it, is not a bad way to bet.

Europe’s fifty year bonds signal decades long slump –