Bond investors should worry about government borrowing, because there’s a danger it will fall too fast.
No, I’m not being contrarian. The fact is that the best times for gilt investors are when government borrowing is high. The big deficits of the early 1990s, 2008-09 and last year saw better returns on gilts than did the public sector surpluses of 1999-2000.
There is, of course, a simple reason for this. Government borrowing is the counterpart to private sector net lending. When the private sector invests less and saves more we get a recession – and recessions are good for government bonds. But the counterpart to increased private sector net lending is, by definition, increased government borrowing.