When you can Print, fine. And when you can’t?
So inflation is -5% and 10y USTs trade at -3.50% yield.
That means it is a good deal to buy USTs for a real yield of +1.5%. A country with debt only in its own currency could just print its own currency and repay such debt. (Let’s ignore the possibility of a weakening currency and its consequences).
But how can a company, with declining sales in such currency (deflation), but positive credit spreads as it can’t print any currency, repay its debt?
Below is a chart of the Yield-to-Worst of the Barclays US Aggregate Corporate Bond Index.
All time lows. Average modified duration is now near 9.
Due to tight credit spreads and low yields corporations are issuing debt with the longest average duration ever. (Chart doesn’t show “ever”, but I’d say 99% probability. If otherwise I’ll pay you a beer)
Will Central Banks print just enough to avoid deflation and create inflation mild enough to make these bonds a good risk-reward?
Speaking of precision…