Government bond investors will pay the price for monetary policies that are helping indebted Western governments pay off their debts cheaply.
Governments and their central banks are quick to point out the benefits of quantitative easing (QE) and near-zero interest rates on economic growth but they remain quiet on another advantage - it allows them to borrow money at rates well below what would otherwise be the market rate.
Undoubtedly keeping interest rates low is an important policy tool given the extraordinarily high debt levels in the developed world.
This is critical where personal debt levels are very high, and it can help to stimulate personal and corporate spending. In the short term, low rates make it cheaper for governments to service their debt and avoid harsher fiscal measures that would be needed to raise the necessary tax revenue to cover higher interest payments.
Creditors Hit By An "Invisible Tax"
That said, when central banks actively seek to engineer negative real interest rates, it follows they are imposing negative real returns on investors.
They are in effect placing an invisible tax on creditors and forcing a redistribution of wealth from those who do not intend to spend immediately to those who do.
Negative interest rates alongside modest inflation also help to reduce the ratio of debt to GDP where that debt is denominated in domestic currency, by eroding or liquidating the real value of government debt.
In their study of the liquidation of government debt via negative interest rates, two academics Carmen Reinhart and Belan Sbrancia found that real interest rates for the advanced economies in their study were negative roughly half of the time during 1945-1980.
For the US and the UK, they estimated that the annual liquidation of debt via negative real interest rates amounted on average to 3-4% of GDP a year.
Such annual deficit reduction quickly and usefully accumulates, even without any compounding, to a 30-40% of GDP debt reduction over the course of a decade.
Currency Market is the New Financial Policeman
The distortion in the price of certain financial assets to support the developed world's fragile financial system has been another consequence of near-zero interest rates.
This fragility, alongside lacklustre growth prospects, has led many investors to place too high a reliance on traditional safe havens such as sovereign bonds.
Our negative view on government debt therefore is not based on fear of an inflation surge but on the belief that bonds are likely to return to levels more consistent with history and central bank targets.
The massive intervention of many governments in their own bond markets via quantitative easing means the task of policing the financial behaviour of countries has started shifting from the global bond markets to the currency markets.
Consequently, we aim to profit from anticipated weakness in certain currencies that act as a proxy for a weakening underlying economy.
Stock Market Rally Masks Global Weakness
We do, however, remain positive about the rally in global stock markets but investors should not lose sight of the fragility of Europe in particular.
In Europe, the confiscatory method used to recapitalise banks in Cyprus could yet have consequences for the wider financial system while the length of time it took for Italy to form a government reflects the disillusion and resistance to reforms needed to restore growth.
France, meanwhile, is slowing as exports shrink and debts rise. We are more positive about the US where the recovery, thus far, has been resilient. We expect US consumers to provide an important support for global growth.
When it comes to our limited exposure to stocks, our choice is to focus on Japan. Despite the sharp rise in the Japanese stock market and likelihood of some consolidation, there is, in our view, still value to be had.
We believe global investors continue to place too much faith in central bankers who are neither omniscient nor omnipotent. We do not subscribe to the view that in a world of too much debt it is sensible to buy even more as many institutions are doing.
Inflation rates are not worryingly high but real returns - in other words returns once inflation is taken into account - on many government bonds are negative. It is a situation that cannot persist indefinitely. It is an anomaly that is a core view of our portfolio strategy.
That said, we do acknowledge that global interest rates are quite likely to remain low for a while yet as the economic recovery in the US is offset by continued structural weakness in Europe.
Miles Geldard & Lee Manzi are managers of the Jupiter Strategic Reserve Fund & the Jupiter Strategic Total Return Sicav fund at Jupiter Asset Management.
Disclaimer: the market commentary should be only taken by professional investors only, not retail