It is difficult to gauge what investors are betting on, while gobbling up ultra-long dated debt at record low yield because they will turn out as big losers when inflation arrives.
So is the bet that inflation will remain low for very long, so long to justify piling up into 100 year debt at just 2.3% yield. This is the yield level, where both Belgium and Ireland have issued century debt. UK has already tapped into 50 year. Now Switzerland has announced that it will launch debt maturing in 2058 tomorrow with 0.5% coupons. Today Latvia has come out with its longest ever debt 20 year, which has been marked at 20 basis points higher that European sovereign yield.
Investors are piling at such levels that a relatively small change in yield could wipe out their entire year’s return.
Inflation returns or not, investors should ask themselves the question, will they be interested in buying these bonds if European Central Bank (ECB) reverse courses and stops buying or even starts selling? So does the FED and Bank of Japan.
If not, then do they have an exit strategy?
Things will be very ugly, once the inflation returns.
The material has been provided by InstaForex Company – www.instaforex.com