temasek affiliates
Government bonds are supposed to be among the safest investments for which soared in late 2008, when there was panic in the stock market. In the popular documentary series "The Ascent of Money", a Niall Ferguson, a respected British economist and historian, went back into history to the times that government bonds have been broken before and explained why that happened and the aftermath. He used Argentina as an example. Since 1975, the Argentine government had to sell a large amount of bonds to raise money to finance wars 2. The debt became so great that people lose faith that the government could pay back debt and nobody wanted to buy government bonds, causing bond yields (interest) is very high. In order to to service interest payments, the government had to keep printing more money and causing hyperinflation.
In December 2001, the government finally defaulted their obligations. I remember hearing about the problem of hyperinflation in Argentina and Indonesia years ago when it happened, but never really understood what it caused. Now we hear the same thing happening in Zimbabwe. To be honest, it never really bothered me before because I thought this kind of thing only happens in countries the third world. What I did not realize until I saw this documentary was that Argentina was the sixth richest country in the world, where every family could afford meat and a bottle of wine for dinner when this happened to them.
If it can happen to all the world's sixth richest country, would be unthinkable to happen to the country's richest the world? The biggest buyers of U.S. government bonds are the Chinese. The Chinese government has begun showing his concern for the safety of their investments in the U.S.. When Timothy Geithner, speaking during his trip to China, he was laughed at by Chinese students when he declared that U.S. assets are safe. Sovereign wealth funds like the Temasek Holdings of Singapore has recently dumped large holdings of U.S. assets in favor of buying more assets in Asia. Since March 2009, bond yields have been rising and U.S. dollar has grown weaker against most major currencies.
The government U.S. is planning to request another $ 10 billion over the next 10 years. Can they afford to do that if bond yields continue to rise? Does the U.S. Government going the same way as Argentina and print more money than we already know that will lead to hyperinflation and the devaluation of the U.S. dollar? Bond yields have not yet reached the highs and many optimists who believe that it is quite normal when the market rises is rallying investors are simply moving money from bonds to stocks for better returns. I hope you are right, as I really like to see pension funds, which are big investors Bond gets hurt if history repeats itself.
Christina Bong
http://blog.sli-smsf.com/
Christina is a Trustee and Chief Investment Officer for SLI Superannuation Fund, a Self Managed Super Fund set up in March 2007. In addition to managing the investments for her SMSF, she also actively trades options in the US market for her family owned investment company.