As for investors in government bonds, given how debt levels will have expanded versus GDP -- the Congressional Budget Office says the U.S. government’s ratio could hit 101% by the end of this fiscal year, from 79% last year -- it’s unlikely policy makers will let interest rates exceed inflation. So-called financial repression also helped major nations run down debt after WWII.

The surge in borrowing has also revived the debate about central banks directly monetizing government financing. At the end of the day, however, that simply swaps one type of obligation -- government bonds -- for another: reserves deposited with the central bank, as Commerzbank’s Rieger puts it.

“In the end, the asset side of central bank balance sheets will consist of giant quantities of low-yielding debt -- inhibiting rate increases for decades,” he wrote.

Creative Destruction
Net-net, lower borrowing costs ought to be good for companies, and equity valuations in particular. Stephen Jen, who runs hedge fund and advisory firm Eurizon SLJ Capital, argues it “ought to be a major tailwind” for strong firms with good balance sheets. But his take suggests not all will benefit -- something Deutsche Bank AG wealth-management investment chiefs agree with.

“Those sectors better able to innovate and adapt to the new post-coronavirus world will fare better; ‘creative destruction’ could force corporate failure and defaults elsewhere,” Nolting and Muller wrote. “Corporate earnings are likely to fall further than current consensus estimates.”

The bottom line: the debate on long-term effects for investors is just beginning.

This article was provided by Bloomberg News.

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