Are government bonds a buy?

July 2023

Should investors buy government bonds at present?

Although outside our daily focus (the Kennox Fund only invests in global equities), we appreciate the importance of bonds:

· They represent a huge portion of global savings

· They moonlight as the “risk free rate” (although former SVB management might argue with you here)

· They remain essential to the smooth functioning of governments worldwide

Kennox has long been wary of government bonds and our unease is only increasingly. Global governments (bonds’ ultimate backers) are getting more and more exuberant in trying to absolve the private sector of risk. This drives spending and the plentiful supply of bonds ever higher. Our wariness was reinforced by a few graphs in the excellent BIS Annual Economic Report, such as this one:

Annual Economic Report 2023 (bis.org)

That this ballooning in debt levels has been increasingly absorbed by central banks only adds to the worry – the Fed owns about a quarter of all their government debt, the BOE about 35%, the ECB about 40% and the BoJ an astounding 50% (as shown on the graph on page 52 of the report).

Owning a government bond is aligning yourself and your wealth with this sort of spendthrift behaviour, questionable pass-the-parcel strategy, and monetary wishful thinking. In the short term, this might well not matter. But in the long term, this is a significant headwind, if not an outright trainwreck. We urge caution while merrily sticking to what we know. Back to our day jobs...

PS – we would recommend reading the “Longer-Term Backdrop” section in the introduction of the BIS report (on page “ix”). It’s only a page long but an excellent summary aligned to our view of how we got into this mess.