Credit: Governments are digging into their pockets and finding an appetite for spending
- Anti-immigration
- Anti-globalization
- Less fiscal discipline
Brexit and Trump have highlighted the first two but the third might be the most critical. Traditional governments with pro-immigration, pro-globalization models may look to shore up support by spending more.
The bond market certainly doesn't mind, with borrowing costs at all time lows throughout the developed world.
If you listen to economic commentary, a consensus has slowly emerged that it's ok to spend, especially on investments that could improve productivity like infrastructure.
So let's assume that governments flip the switch on deficits and infrastructure spending. Will it deliver inflation?
Bloomberg writes today that some bond fund managers are betting that it will.
"We have reached a point where governments realized that austerity will not help," said Cosimo Marasciulo, who, as head of government bonds at Pioneer, helps manage $250 billion of assets. "Some are abandoning that idea and shifting their focus to stimulating the economy. They've not been aggressive yet, but it's a start. We cannot underestimate its implication on inflation."
He's one manager that's betting the market is underestimating the chance of inflation. He's not saying it will run away but many measures of implied inflation are ultra-low for 30 years. He noted signs of better wages and hiring.
PIMCO also believes fiscal stimulus is under-priced. "The fiscal-easing tilt contributes to our cautious view regarding interest-rate risk more broadly," said CIO Dan Ivascyn. "You have this fundamental trend and theme that could lead to a potential increase in growth, and perhaps a bit of a reflationary angle, and therefore a potential for higher intermediate- to longer-term rates."
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
