Are any government bonds a good bet?

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.

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.

“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”:

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.