Some western Governments may resort to engineering pools of captive capital as a form of financial repression, thus impacting the risk associated with bonds, according to Blackrock Australia head of fixed income, Steve Miller.
He said that rather than completely defaulting, Blackrock believed debt-stressed developed countries might try to disguise their unwillingness to fully meet obligations to global creditors.
It was a risk that many superannuation funds and retail investors had failed to recognise, assuming western government bonds were risk free.
Discussing the possibility of Government’s pursuing “financial repression”, Miller said they could utilise regulations to dictate the degree to which domestic financial institutions were required to hold Government debt.
“As forced buyers of Government debt, financial institutions would essentially be compelled to accept lower returns than could be available in an open market,” the Blackrock analysis said.
It went on to state that it did not believed the potential threats to valuations and returns from Government debt were therefore being adequately captured in current issuer-weighted fixed income benchmarks.
“Traditional fixed income benchmarks assume that the riskiness of all western governments’ debt is equal,” the analysis said. “Europe’s rolling debt crisis is just one of the events that show that this assumption is hugely problematic.”
