Speaking to InvestorDaily, Altius Asset Management chief investment officer Bill Bovingdon said investors are most likely hoarding European sovereign bonds ahead of the European Central Bank’s (ECB’s) quantitative easing program.
On Tuesday, Austria joined a handful of other European countries – including Germany and Finland – that are selling five-year government bonds for a negative yield.
This means, in effect, that investors are paying sovereign nations to hold their money for five years.
But that does not necessarily mean investors believe deflation will take hold within five years, or even 10, Mr Bovingdon said.
Instead, investors may be buying up bonds in the expectation that the ECB’s bond-buying QE will drive yields even lower (and prices higher), he said.
“Are 10-year [German] bunds negative because investors are concerned about 10-year inflation? Or is it just pre-postiioning for the QE program?” Mr Bovingdon asked.
“They may be happy to buy at -0.5 per cent because they’ll be able to sell them at minus -0.6 per cent when the ECB comes knocking,” he said.
After all, there is a “paucity of bonds” to be used for the ECB’s QE program, Mr Bovingdon added.
Looking at deflation in a historical sense, “true” deflation is almost unheard of, he said.
There have only been two occasions when true deflation has gripped the world, Mr Bovingdon said – during the Great Depression, and in the 1890s.
“Rampant inflation is abnormal as well. Typically, we flit between mild inflation and mild disinflation and you still have bond yields at 2-3 per cent,” he said.
The fear that is constantly raised about deflation – people leaving their money under the mattress and deferring consumption – only happens when deflation is “expected and predictable”, Mr Bovingdon said.
“So I don’t think there’s a long-term deflation view out there. I think it’s very much opportunistic.”
