Grandi was talking some time ago about this – Long bonds are back and 30-Year Treasury Bond Revived After 4-Year Hiatus.
I don’t really remember how he explained it, but I think it went something like this….what does this revival mean? If you are in government you have a number of ways to raise money, for instance you could raise taxes, or you could issue bonds. Raising taxes will immediately cause unhappiness among your voters. Issuing bonds is like deferring taxation, so the next guys in power get to pay the price for your spending now.
Whats more interesting though (if you’ll excuse the pun) is the cost of borrowing this way. Bonds are fixed rate, this is considered to be the risk-free rate, the return you get if you don’t want to risk anything, government bonds are safe, barring the risk of the government collapsing, in which case all bets are off anyway.
Give or take the risk-free rate should roughly match up with inflation, meaning that if you’re taking no risk with your money it still buys the same ammount of stuff. Well, thats the theory. But what happens if inflation were to increase after the fixed rate bonds were issued? Your risk-free money buys less than it did before. Which surely is a risk, of sorts, an erosion risk.
Its worse than that, though, since now the government has the opposite end of that deal, it has to put less resources in to paying your bond interest. Which clearly gives it an incentive to run inflation higher. There are of course reasons for it to run inflation lower, too, but more long bonds pushes that balance.
So the next question is, what would cause inflation to rise? Well, I’m guessing things like raw material cost increasing, or energy cost increasing.
Whats the point of the fuel protests? I’d kinda read it as a bunch of truckers who just saw their bills going up without looking at the fact that everyone elses bills were going up too, if the cost of fuel increases and it still costs everyone pretty much the same ammount then the price of the end product goes up rather than the profit of the deliverer of the product coming down – this is where the futures market can help, you can buy a contract to buy diesel next month at todays prices. I wonder how big the price differential between road and rail freight transport is these days?
Maybe theres more to it than first meets the eye….