It has always been a pretty sound rule of thumb that deflation is good for fixed interest bonds and bad for equities. But not any more. Bond markets are running scared of heavily indebted developed countries that cannot print money.
The underlying logic is that no country defaults on its domestic bonds if it retains the right to set the printing presses in motion. Yet it seems counter-intuitive that bond markets, with their traditional fear of inflation, should punish a country for not being able to debase its currency.
The demise of this conventional market wisdom is one of the achievements, for want of a better word, of European Monetary Union.
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