The reason you own bonds - particularly government bonds - is because they are better than the alternative.
At the point somebody is bidding in a primary government bond auction, they are either a pension fund with a bank deposit, and/or the bank backing that deposit with central bank reserves.
Even with all the investment options available, somebody always has to end up in that position in aggregate. Asset prices rise across the board until this indifference level is reached.
Central Bank reserves are remunerated at a fraction of one percent at the moment. Bank deposits even less. Bank deposits also suffer from the risk that the bank will fail.
Therefore relative to the only options left, government bonds represent a good investment. Particularly if you are a pension fund under regulatory instructions to fix your income with certainty.
What's particularly interesting is that the bid for the bond will come from two places - the pension fund, and the bank itself - using essentially the same money. The sale to either is settled with precisely the same set of central bank reserves. If the bank wins the auction it will end up backing the bank deposit with the bond rather than reserves. If the pension fund wins the auction, the deposit and the bank reserves are deleted from the bank's books.
I think pension funds are the bag holders here. They require 6% yield or so to function, and real yields are still negative or near zero. Yet their investment mandates often dictate they need to have bonds or a mix of equities and bonds.
They require a 6% yield to function over the long term. However you can solve that by transfer from the young - which is what we are seeing.
Hence Compulsory Pension Contributions in certain jurisdictions. Which when you follow it through is just a privatised tax where some financial middlemen get to skim off the top.
Life insurers are the other big "forced" buyers of long bonds. Regulation tends to be stricter on them in terms of requiring a certain portfolio vs pension funds too.
At the point somebody is bidding in a primary government bond auction, they are either a pension fund with a bank deposit, and/or the bank backing that deposit with central bank reserves.
Even with all the investment options available, somebody always has to end up in that position in aggregate. Asset prices rise across the board until this indifference level is reached.
Central Bank reserves are remunerated at a fraction of one percent at the moment. Bank deposits even less. Bank deposits also suffer from the risk that the bank will fail.
Therefore relative to the only options left, government bonds represent a good investment. Particularly if you are a pension fund under regulatory instructions to fix your income with certainty.
What's particularly interesting is that the bid for the bond will come from two places - the pension fund, and the bank itself - using essentially the same money. The sale to either is settled with precisely the same set of central bank reserves. If the bank wins the auction it will end up backing the bank deposit with the bond rather than reserves. If the pension fund wins the auction, the deposit and the bank reserves are deleted from the bank's books.