Bonds safe(ish) despite debt crises

Investors shouldn’t let European debt woes and a global economic slowdown put them off the bond market, a visiting Pimco boss says.

Tuesday, November 1st 2011, 6:53AM 1 Comment

by Niko Kloeten

Scott Mather, managing director of the bond fund manager, said at a breakfast in Auckland that despite several countries facing sovereign debt crises, overall the bond market is in good shape.

The economic picture he painted was gloomy: Pimco has lowered its GDP growth forecast to 0% across the developed world next year.

And he said Greece will default "a few times" starting "at the end of this week or the end of this year", while Ireland has a more than 50% likelihood of defaulting and Portugal about a 75% chance.

However, while the prognosis for these countries is bleak, Mather said the picture is brighter in some other countries, particularly those such as the United States and the United Kingdom that can use their currencies to avoid defaulting on their bonds.

And he said if a sovereign debt crisis did hit global markets, every part of the economy including the sharemarket would be affected, not just bonds.

"Sovereign debt is the foundation from which everything else is valued - if you start to shake that foundation you get all sorts of bad responses in the rest of the economy."

Investors in sovereign bonds are also being protected by governments undertaking what he described as "financial repression" - punishing savers with artificially low interest rates that enable governments to borrow more at lower cost.

Mather said a problem is that sovereign debt crises are not well understood due to a lack of recent history and the fact they rarely strike wealthy nations.

"Sovereign debt problems have always been confined to emerging markets and there's always been a large response from the international community and the IMF. When the rest of the world was growing quickly there was always a way out."

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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Comments from our readers

On 2 November 2011 at 9:57 am Collin said:

If this isn't a classic example of someone talking their 'own book' then I don't know. Pimco, previously a bond-only manager, got so negative on bonds recently, at higher yields than those trading today, that they branched out into equities. Go figure.