Merryn's Blog

Are any government bonds a good bet?

Most government bonds "look a lousy investment", reckons David Stevenson. But not all – there's still some value down under.

If you want a voice of sanity in this apparently mad financial world, fund management house GMO isn't a bad starting point.

Chief strategist Jeremy Grantham, the firm's co-founder in 1977, is always worth listening to as is his colleague-in-analysis James Montier. So as the latter's latest market commentary has just dropped into my inbox, I've read through it straightaway.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Now I don't concur with Montier's economics he's a self-confessed Keynesian. In short, that means governments ramping up their borrowings in bad times to fire up their economies, and (trying to) pay down the debts when (and if) things get better. That's always seemed a high-risk strategy to me, and I don't have too much faith in politicians making the right calls.

But whether one agrees with him or not, Montier's conclusion about what'll happen next is still worth noting.

Advertisement - Article continues below

"Around the world, we're [now] seeing the rise of the Austerians", he says. "This breed used to be called deficit hawks, set upon reducing what it sees as the government's profligate spending. If the Austerians win the day, we may see some short-term deflationary pressures".

In other words, we'll get a double dip and prices will drop.

Then, reckons Montier, US Fed boss Ben Bernanke, "despite his complicity in getting us into this mess in the first place", will print money - "which will ultimately lead to long-term inflation pressures". So it could be right back to bubble territory again. And we know how that went wrong last time.

Sure, this isn't exactly new stuff you'll have read plenty of similar stories in MoneyWeek magazine. For example, Bill Bonner was writing about Austerians a month ago.

But then Montier finishes by posing another question - what government bonds are currently safe to hold?

On a "seven-year view, bonds look a lousy investment", he says (I'd agree with that - inflation is bad for conventional bonds as it erodes the fixed rate of interest they pay, which in turn lowers prices). Yet "there are two bond markets still essentially at fair value":

Advertisement - Article continues below

Montier reckons that government bonds in Australia and New Zealand "look fairly-priced and provide useful insurance". Both are yielding more than 5%. Compared with the mere 3.5% now available on gilts, that looks attractive. New Zealand could be tricky, but if you like the idea still not entirely straightforward, but could be worth it the Reserve Bank of Australia site has details. Do bear in mind however, that as a sterling investor you are taking on currency risk if you decide to buy Australian-dollar denominated assets.


Most Popular


Want to make money in 2020? Gold and silver are looking like a good bet

If you want to make money from investing, says Dominic Frisby, it’s simple: find a bull market and go long. And in 2020 gold and silver are in a bull …
22 Jan 2020

Money Minute Wednesday 22 January: UK public borrowing

Today's Money Minute looks ahead to the latest on of the UK's public finances, with the Office for Budget Responsibility’s forecasts for borrowing thi…
22 Jan 2020

Money Minute Thursday 23 January: European interest rates

In today's Money Minute we look ahead to Christine Lagarde's second interest-rate-setting meeting at the European Central Bank.
23 Jan 2020
Share tips

India’s small and mid-cap stocks are set for big gains – here are three to buy now

Each week, a professional investor tells us where he’d put his money. This week: David Cornell of the India Capital Growth Fund highlights three favou…
20 Jan 2020