Sovereign Debt – Global Consequences & the Chinese Dichotomy
Sovereign bond yields will go on rising. The two drivers: inflation and fiscal deficits, will both deteriorate and see to that. Energy inflation will rise as inventories continue to fall. The Hunger Wave of disrupted global agricultural prices is only just beginning.
Bond markets are getting sensitive to the rate of change in sovereign debt to GDP rather than the absolute level of it. That spells no relief until fiscal policy is radically recast in Japan and the US. It also means previous safe havens like Germany with low ratios of debt to GDP don't work any more.. That because a German debt to GDP ratio of 66% today is rising by 4 percentage points year.
China stands out with a different scenario. Despite its rising debt ratio, its bond yields have fallen. This is due to financial repression, where household savings are largely trapped in domestic bank deposits. This avoids a funding crisis but leads to poor investment and low consumption, which stifles economic growth.
We will sell the long 2-year German Bund anchor in the Wealth Preservation Portfolio. We will shift to long positions in Swiss and Singaporean bonds, both public and private. The portfolio will maintain short positions in sovereign debt in the US, Japan, and France through 10-30 year bond shorts.