Overview
Through the great inflation period of the late 1970s and for about thirty years prior all bonds taken broadly as an asset class were widely considered to be “certificates of confiscation” The portfolio losses were persistent and seemingly endless.
But near the end of 1979 and into 1981 or so, with the late great Paul Volcker’s guidance, the lengthy confiscation period ended (with double digit rates on Treasuries and bills) and a new giant bond bull market was born. This has now stretched to about forty years and an entire generation or two no longer has had any experience with such a bitter bond environment.
Now we are facing a period of deflation and bond bulls are everywhere -- with many looking toward US governments going to yields of zero or below as the Fed, in presumed efforts to stave off recession, has as of this weekend already gone “nuclear”. After all, the bond world outside the US is already filled with an estimated $17 trillion of below zero issues.
In light of the deflationary action in equities and probably in anticipation of an economic dive going into 2021-22, the widespread bullishness on bonds is entirely understandable,
But in my opinion, it is probably wrong.
The Reasons Why
First and foremost, negative interest rates are a pricing distortion that hides risk. At below zero, the owner of cash in effect pays a “storage fee.” As such, it cannot stimulate economic growth because it right away diminishes discretionary income.
It also hides risk because when you pay the bank or government issuer to store your cash for five, ten, or even twenty years -- do you know if the bank or government entity will even exist by the end of the term? If not, too bad! You took a mostly hidden risk of not getting any of
