Government Bond Bust

From UK Telegraph:

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US will lose AAA credit rating

Jim Leaviss, head of retail fixed interest at M&G, the fund management arm of the Prudential, said France remains "the AAA economy closest to a downgrade" and that the US "will lose its AAA rating – but not in 2011" as the two countries grapple with debt.

Although the UK is under pressure, he believes, he did not state whether it would also lose its rating.

His concern is that "economic growth will not make the inroads ... that the central banks want to see". However, he does not believe there will be a double-dip recession in any of the three countries. "These economies will continue a period of expansion that is sub-trend," he said.

The UK, he predicts, will see "a renewed bout of quantitative easing" even though "inflation will remain above target at a headline level".

"We believe that central bank thinking in the UK and Europe has moved away from pure inflation-targeting to more of a 'dual-mandate', like the Federal Reserve, of full-employment and price stability," he explained.

"Central banks and governments are throwing everything they have in their monetary and fiscal policy weaponry to generate a self-sustaining economic recovery."

The Bank of England has stressed that it has not abandoned its 2pc inflation target, even though inflation currently stands at 3.3pc.

He expects corporate bonds to "continue to outperform their heavily indebted government counterparts".


This British fund manager has hit the nail on the head. The US will lose its coveted credit rating at some point soon. My view is a one year time frame is more realistic than the two years Mr. Leaviss suggests. His suggestion the corporate bonds are the investments to hold is a better suggestion than most advisors make in our current environment. Again, in my view his timing is could be better, as a bond bust is coming and buying after the bust would improve returns. The gold to bond ratio remains at extreme levels (over 11) which suggests our friend the old reliable yellow metal is considered more constant than government promises. My estimate is for corporate bonds to perform well once yields peak, which may not be for a year or more. Government bonds will behave the same way, but the timeline is less certain. For this investor, any yield less than 10% with an entity that remains solvent is inadequate in our present environment.