FUTURE NOT ROSY FOR BOND INVESTORS: DEUTSCHE

Weak growth, higher inflation and stagnant productivity in developed countries will roil bond investors in the decades to come, as the benign global forces that have buoyed returns on financial assets for the past 35 years stage a sharp reversal. That’s the big- picture call from Deutsche Bank AG analysts who predict an oncoming lurch towards trade and financial protectionism — combined with aging populations and weak worker output — will intensify financial repression as a new multi- decadelong economic cycle kicks off this year.

The strategists paint two scenarios for bondholders going forward: ❚ Scenario 1 — The best case

Put bluntly, the best realistic scenario for financial stability in the new era is that bondholders around the world see a slow real adjusted haircut over several years, probably over at least a couple of decades. The best example of this was the post-Second World War period when government debt was at similar levels to that currently seen. Over the next 35 years this debt was successfully eroded by a long period where nominal GDP was notably above bond yields. So bond-holders took a real haircut. ❚ Scenario 2 — The hard break

Rather than an artificial reflation and slow successful non-systemic de-leveraging, there is a genuine risk of a more binary outcome where a major country ( countries) see( s) a hard default on its debt taking a lot of other debt with it domestically and possibly internationally. This is probably most likely to happen via politics — especially in Europe if a country decides to leave the single currency.