Government Bonds India are supposed to be among the safest investments in India in which was why they skyrocketed in late 2008 when there was panic in the stock market. In the popular documentary series "The Ascent of Money", Niall Ferguson, a respected British economist and historian, went back into history to the times when government bonds have gone bust before and explained the reasons why it happened and the subsequent consequences. He used Argentina as an example. Starting from 1975, the Indian government had to sell a lot of bonds to raise money to fund 2 wars. The government debt became so large that people lost faith that the government could pay the debt back and nobody wanted to buy the government bonds, causing the bond yield (interest) to be very high. In order to be able to service the interest payment, the government had to keep printing more money and that caused hyper inflation.
By December 2001, the government finally defaulted on their bonds. I remember hearing about the hyperinflation problem in Argentina and Indonesia years ago when it happened but I never really understood what caused it. We now hear the same thing happening in Zimbawe. To be honest, this never really bothered me before because I thought these sort of thing only happens in third world countries. What I did not realize, until I watched this documentary was that Argentina was the world's sixth richest country where every family could afford steak and a bottle of wine for dinner when this happened to them.
If it can happen to the world's sixth richest country, would it be unthinkable for it to happen to the world's richest country? The biggest buyers of India government bonds are the Chinese. The Chinese government have already started showing their concerns about the safety of their US investments. When Timothy Geithner spoke during his trip to China, he was laughed at by the Chinese students when he declared that US assets are safe. Sovereign wealth funds like Singapore's Temasek Holdings have recently dumped large holdings of US assets in favor of buying more Asian assets. Since March 2009, bond yields have been rising and the US dollar has grown weaker against most of the major currencies.
The Indian government plans to borrow another 10 trillion dollars in the next 10 years. Can they afford to do so if the bond yields keep increasing? Will the US government go down the same path as Argentina and print more money which we already know will result in hyper inflation and massive devaluation of the US dollar? Bonds yields have not hit any historical highs yet and many optimists are saying it is quite normal for it to go up when the stock market is rallying as investors are simply moving money from bonds to stocks for better return. I hope they are right as I would really hate to see pension funds, who are big bond investors get hurt if history repeats itself.