The Market Ticker
Commentary on The Capital Markets- Category [Bonds]

They call it "junk" for a reason.....

Bond investors are showing no inclination to fight the European Central Bank, and are instead marching towards ever riskier debt.

The central bank’s widely-anticipated €60 billion-a-month ($65 billion) program, which started Monday, has already pumped up government bond prices, even for euro member states that once received international aid to stay afloat. The rally shows no sign of abating even now that the program has begun.

“As an investor, if you have to meet certain return targets, you basically have a choice. Either you have to buy longer-dated bonds or you have to move further down the credit spectrum to secure returns,” said Charlie Diebel head of rates and strategy at Aviva Investors, which looks after about £240 billion ($362 billion) in funds.

This is the problem with so-called "return targets" and deficit spending.

See, deficit spending by governments results in enormous pressure on central banks to "help" the economy through "machining" interest rates.  Absent said intervention as deficits continue and fail to return real economic progress beyond the amount borrowed borrowing costs go up.

They go up because investors are not stupid to an individual, and if you borrow money for any purpose other than productive investment (that is, building infrastructure, production capacity, etc), such as social handouts and similar programs, the immediate mathematical inflationary impact is not counter-balanced by economic progress of greater amount.

In other words the so-called "bond investor" loses value (which is what he really was attempting to buy.)

Nobody "invests" or "lends" to make "money", they lend or invest to obtain value.

Value, in economic terms, is objective.  "Money" is subjective in that the amount of it, and thus the value of any unit of it, changes over time.

A gallon of gas is objective because it has a certain number of BTUs of energy in it (about 110,000) and will today, tomorrow, and ten years from now.  A hundred cubic feet of natural gas will have the same energy content today or a year from now.  A gallon of water will sustain your life for the same amount of time today, tomorrow, and a year from now.  And so on.

But a "dollar" is no guarantee of anything.

So when such "investors" are faced with such "targets", and the government is spending in deficit, they must increase that target so as to obtain the value they are targeting rather than losing value.

When central banks operate in a fashion that the risk-free rate of return is lower than the expansion of the monetary supply of both credit and currency summed this is a losing proposition and therefore your only option if you must remain in said market is to increase the risk, duration or both you accept.

But this is a losing proposition too because there is no such thing as a free lunch!

In other words what these "bond managers" are doing is swallowing a grenade rather than sticking up the middle finger or pushing back against the government deficit spending policy because it's easier and, they hope, they'll retire with their nice cashed-out funds before it goes off.

Good luck on that one, says I.

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