{"id":19483,"date":"2020-09-04T08:36:00","date_gmt":"2020-09-04T12:36:00","guid":{"rendered":"https:\/\/www.benefitscanada.com\/news\/plan-sponsor-week-is-it-time-for-bond-owners-to-shift-how-they-view-deficits-and-debt-149351"},"modified":"2020-09-04T08:36:00","modified_gmt":"2020-09-04T12:36:00","slug":"plan-sponsor-week-is-it-time-for-bond-owners-to-shift-how-they-view-deficits-and-debt","status":"publish","type":"post","link":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/2020\/09\/04\/plan-sponsor-week-is-it-time-for-bond-owners-to-shift-how-they-view-deficits-and-debt\/","title":{"rendered":"Plan Sponsor Week: Is it time for bond owners to shift how they view deficits and debt? \u00a0"},"content":{"rendered":"
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Yaelle Gang, the Canadian Investment Review<\/span> | September 4, 2020 <\/p>\n

While rising government deficits and debt are concerning for many bond owners, they should actually be more concerned that deficits aren\u2019t big enough, said David Bezic, an independent economic consultant, during a session at Benefits Canada<\/em> and the Canadian Investment Review<\/em>\u2019s 2020 Plan Sponsor Week in mid-August.<\/p>\n

Many of the concerns around debt and deficits are founded on misconceptions, he noted. \u201cThese misconceptions arise because it\u2019s a natural tendency to apply our personal experience to our analysis. And, when we look out at the world, we apply our own budget constraints, our own financial situation to other entities when it might not be entirely relevant. Then also, some of these misconceptions just result from a misunderstanding of the way the money system actually works at an operational level.\u201d<\/p>\n

Read: Will social bonds\u2019 popularity grow with coronavirus recovery?<\/a><\/strong><\/p>\n

As an example, Bezic noted the idea that a government defaulting on debt or being downgraded will impact bond yields is based on a misconception that puts currency issuers into the same bucket as the people who use the currency.<\/p>\n

Currency issuers include countries with their own currency that also have debt denominated in that currency, such as Canada and the U.S. \u201cJust as a scorekeeper can\u2019t run out of points, a currency issuer can\u2019t run out of money,\u201d he said. \u201cAnd just as a scorekeeper, by not putting up points on the board early in the game, it doesn\u2019t mean that there\u2019s now more points left to add later in the game.\u201d<\/p>\n

As such, governments have flexibility that other entities don\u2019t have. Pointing to 10-year bond yields between 2008 and 2010, Bezic noted the U.S. had lower bond yields than Italy throughout the earlier part of the decade even through a downgrade and continued to decline afterwards. However, Italy, which is a currency user, saw higher yields.<\/p>\n

When the European Central Bank introduced certain funding programs, yields in Italy started coming down because the programs meant Italy became more like a currency issuer, he added. \u201cBasically, what they did is, they provided financing to banks and they allowed banks to use sovereign government\u2019s debt as collateral for that financing. So that\u2019s a kind of indirect way of making Italy backed by the ECB.\u201d<\/p>\n

Read: Currency considerations as plan sponsors grapple with volatility<\/a><\/strong><\/p>\n

Bezic said practitioners should be mindful that credit risk is real for issuers and suggested they keep an eye on developments that make currency users more like issuers.<\/p>\n

He also highlighted that government deficits actually add assets to the private sector\u2019s balance sheets. \u201c[Government bonds] sit on the asset side of our balance sheets and they\u2019re the result of deficits. If it wasn\u2019t for deficits, we wouldn\u2019t be able to own all those bonds.\u201d<\/p>\n

Typically, people view deficit risk growing too big as a risk, he noted. \u201cBut when you recognize that they\u2019re the source of the bonds that you use to manage either pensions or various funds, the real risk is that there just aren\u2019t enough bonds.\u201d<\/p>\n

For example, Australia saw a series of surpluses in the early 2000s and wasn\u2019t issuing bonds. As a result, large investors became concerned about supply and put pressure on the government. \u201c[The Australian government] did an official review and . . . the conclusion . . . is that successive governments have committed to retaining a liquid and efficient CGS market \u2014 which are their national bonds \u2014 even in the absence of a budget financing requirement. What this basically meant is they were still issuing bonds even though they were running surpluses.<\/p>\n

\u201cAnd that is an example that really highlights the value and the role that risk-free assets play. If you don\u2019t think about where they come from, then you\u2019re more likely to vote for prudent government and smaller deficits, but you\u2019d just be reducing the supply of these assets that we all use and want so much.\u201d<\/p>\n

All of the 2020 Plan Sponsor Week sessions are available on-demand at benefitscanada.com\/webinars<\/a>.<\/strong><\/p>\n

Read: Which global bonds to consider in today\u2019s interest rate environment<\/a><\/strong><\/p>\n

Read the full article at BenefitsCanada.com<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Yaelle Gang, the Canadian Investment Review | September 4, 2020 While rising government deficits and debt are concerning for many bond owners, they should actually be more concerned that deficits aren\u2019t big enough, said David Bezic,...<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[],"tags":[],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/posts\/19483"}],"collection":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/comments?post=19483"}],"version-history":[{"count":0,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/posts\/19483\/revisions"}],"wp:attachment":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/media?parent=19483"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/categories?post=19483"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/tags?post=19483"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}