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The negative yield revolution

The race against time to shore up the world's reservoir of assets

Some of the most dramatic news pictures of the summer were like something out of a 1950s Hollywood disaster movie.

No, I’m not talking about Brexit.

It was the emergency operation to plug the Whaley Bridge dam in Derbyshire which had shown alarming signs that it was about to collapse, releasing millions of gallons of water on the town below.

Instead, the RAF and fire service worked around the clock to buttress the section which had crumbled as every pump in the Peak District was drafted in to (successfully) reduce the water level.

Put to one side the alarm that a structure as sturdy as a dam could wobble in the UK in the 21st century.

Negative yields

It did put me in mind of the ongoing, albeit much less dramatic effort, to pump life back into return-generating assets owned by the world’s pension schemes.

The FT reported that 24 per cent of government and corporate bonds held by them were in negative yield. That is, such was the demand for this safe haven, copper-bottomed investment that they were paying for the privilege of owning them. (note: the higher the demand for bonds, the lower the return or yield they generate)

So $15 trillion of the world’s assets are officially underwater, the rationale being that they will return value over the long-term, rather than today, so it’s one step back to go two forwards.

At the time of writing, I read this in tandem with reports that US ten-year treasury bonds and gilts, the British equivalent, had both plummeted to historically low levels that were noteworthy.

The reason these details are reported in the financial press is because they speak to a bigger picture. Taken together, they make up the index of prices, indicators and signals taking the temperature of the global economy.

The ever-looming, prosperity-sapping presence of Brexit, the rumbling trade war between China and the US (and the rate cuts it brought to America) are side by side with (as I write) expected cuts in the interest rate in the EU and here in the UK. The fear is an American recession which will spread.

Consider hedging

We’ve always advised our pension clients to consider hedging of some degree and, wisely, they generally have.

But when the ocean of money that should be powering the global and national economy is becalmed because these events point to a potential downturn, it raises a different question entirely.

And that is: when do you think things will return to normal?

The collective presumption is that things will eventually (always?) do so but what we are seeing is that expectation, well, crumbling.

Robin Harding in the FT brought this to life with a compelling, point-by-point analysis of the ills of the world’s economic system - and a bleak conclusion.

Time, he said, to stop looking over the horizon for some kind of resolution and see the world as it is.

The way that world looks, 11 years on from the credit crisis, is more stable than that worrying episode but, so far, also worryingly free of the energy and optimism to invest, expand and drive growth forward.

In economic terms, it’s not yet time to clear away the sandbags preventing the damaged infrastructure from failing while repairs continue.

Click to read Living in interesting times


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"We’ve always advised our pension clients to consider hedging of some degree and, wisely, they generally have".

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After 40 years of experience in the pensions world, I'm sharing my insights.