"Bond on bonds – disaster ahead"

... in which Barcap's Tim Bond forecasts developed market bond yields to double over the next decade. I tend to agree with that forecast, although Tim Bond and I have completely divergent reasons why.

He thinks an aging population will cause a surge in government debt/GDP ratios, which will increase risk premia. I believe that an aging population lowers potential GDP growth and thus, bond yields as well. I believe that inflation is the one main driver of bond yields in developed markets: cf. Japan, with it's government debt/GDP closing in on 200% (this is much higher than anything forecast for Europe and US in the next twenty years).

However, I am much less confident that the current handling of the financial crisis will not bring a spurt of high inflation down the road. It's not yet in the cards, but avoiding that scenario will require extreme toughness from policy makers - something I have trouble believing in.

By the way, as I have argued in many posts in the past six months, I believe in the near term the risks to bond yields are tilted to the downside: in my opinion, there is still more risk on banks balance sheets than on sovereigns balance sheets, and renewed flights to quality cannot be dismissed. For now.