There are many candidates for “worst fixed income investment of 2011”, writes Jim Grant in today’s FT. The editor of Grant’s Interest Rate Observer – one of our favourite reads here at MoneyWeek – notes that these include eurozone periphery debt, dodgy muni bonds and Japanese government bonds, all of which have their dangers.
But worst of all, reckons Grant, are gilts. They “yield no more than the running rate of UK inflation. And they are denominated in an inflation-prone currency that has lost more than 90% of its original gold value.”
That should be enough to concern gilt-buyers. Yet they seem to be trusting the Bank of England “not to let a little inflation become too much”.
But Grant – a fan of the gold standard – is sceptical about assurances that “the inflationary bump will pass.” Sure, the surge in inflation to its current level of 3.7% (as measured by the consumer price index) can be blamed on everything from VAT to commodity prices. And wage growth for now is “measured”.
However, judging by history, “the apologists [for sterling]… are wrong.” As Grant points out, “in 1931, a pound bought almost a quarter ounce of gold. Today it will buy one-850th of an ounce.” That doesn’t bode well for the value of the “21st-century model gilt”. In 2011, “in the world’s worst bond competition – it may just take first place.”