"Financial Vandalism" of Low and Negative-Yield Bonds Wreck Pension Plans

-edited

Unnaturally Low and negative yield bond yields are wrecking pension plans.

Pension World Reeling

Most US pension plans assume returns of six to seven percent. They have shied away from government bonds because yields have been too low.

Bloomberg reports Pension World Reels From 'Financial Vandalism' of Falling Yields

A once-unthinkable collapse in global bond yields is forcing pension funds to buy bonds that offer negative returns -- putting the financial security of future retirees in jeopardy.

U.S. institutions managing trillions of dollars in retirement savings -- including the California Public Employees’ Retirement System -- have been ratcheting down return expectations. Japan’s Government Pension Investment Fund, the world’s largest, has warned that money managers risk losses across asset classes. In Europe, pension funds may be forced to cut benefits in part thanks to the decline in rates.

The true madness is pension funds being forced to invest in assets which will be guaranteed to lose, such as in the case of long dated inflation-linked gilts at real yields of -3%,” said Mark Dowding, chief investment officer at BlueBay Asset Management, which has pension-fund mandates. “It is financial vandalism and the government and central banks need to wake up to this.”

Vandalism or Fraud?

I commented on this previously.

Pick the term that suits you.

Five Choice Terms

  1. Fraud
  2. Theft
  3. Counterfeiting
  4. Robbery
  5. Vandalism

The first four are the most accurate but it is good to see someone else thinking about the situation along the right lines.

I discussed this setup in detail in Negative Yield Curves to Infinity and a Reader Question Regarding Fraud

Please read the above link if you don't understand why negative yields constitute fraud, theft, or counterfeiting, and why negative yields can never occur in the absence of manipulation.

Mike "Mish" Shedlock

Comments (31)
No. 1-14
Tengen
Tengen

So, so many ominous signs out there. The gap between reality and public perception is a yawning chasm. One can only marvel at how the "greatest economy ever" claim is believed by tens of millions!

To think that Trump's devotees are the "fed up" contingent, while their opponents are the "America's already great" crowd... yikes! Both groups are so far from reality they'd need the James Webb telescope to catch a glimpse of it.

jivefive99
jivefive99

Before we cry too much about the sinking yields (and I am as my main retirement fund only adds value from yield not bond prices), lets remember that bond PRICES must be skyrocketing upward as well. And if there is no obvious "popping" of the bond bubble right away, some of these investment pools are gonna become very rich. I used to like to deal in dividend paying stocks, till someone mentioned how WAY more important capital gains are. Same thing with bonds.

2banana
2banana

Correction to title of article.

Private pension plan will be wrecked.

Public union pension plans, no matter how fiscally untenable, will be made whole by raising taxes.

Webej
Webej

Nobody is being forced to buy these bonds. There is certainly no buyer's strike, forcing up the interest. It would seem there is a dearth of bonds. The lower the interest rate, the more funds need to invest to fund their liabilities. Every halving of the interest rate means they need double the amount in bonds. With Central Banks bidding up the price (in the vain hope that people will borrow to invest in the actual economy), they are fueling the need for bonds in a self-reinforcing loop.

thimk
thimk

denotes paradim shift to capital gain versus dividend/income producing assets .

Sechel
Sechel

Central Banks have used interest rate policy to transfer wealth from savers to borrowers for decades. And it's not just to borrowers but those with primary access to capital such as banks

stillCJ
stillCJ

Editor

I would add a 6th term to describe negative yielding bonds: Stupidity.

caradoc-again
caradoc-again

A good youtube via with Guy Haselman and Yra Harris in Financial Repression Authority. Released recently. Touches on moral hazard and possible outcomes etc. Worth a listen.

caradoc-again
caradoc-again

One simple observation Guy Haselman makes - Central Bankers have taken on the role of Central Planners but unelected.

Thinking this way its almost along the lines of a coup where a shadow Gov sets the price of money, value of the plebs labour, and the plebs are just pawns with no say or control.

This offers at least 2 ways forward.

A) Elected officials use this as an excuse to take control of the CBs and sell it to the plebs as making CBs accountable and democratically legitimate - disaster.

B) Some Trump types comes forward to change/eliminate/replace the current system and exposes it to gain electoral support.

Advancingtime
Advancingtime

Pensions in many ways are the biggest Ponzi Scheme of modern man. Pension payouts are predicated on the idea the money invested in these funds will yield seven to eight percent a year and in today's low-interest rate environment, this has forced funds into ever riskier investments.

The PBGC America's pension safety net is already under pressure and failing due to the inability of pension funds to meet their future obligations. The math alone is troubling but when coupled with the overwhelming possibility of a major financial dislocation looming in the future a nightmare scenario for pensions drastically increases. More on this subject in the article below.

Augustthegreat
Augustthegreat

Guys, If Trump has bankrupted so many businesses, it’s all because of other people faults!

ReadyKilowatt
ReadyKilowatt

Meanwhile 10,000 a day are turning 65.

Irondoor
Irondoor

. Company issues BBB bonds. Not quite junk. . Pension fund buys said bonds. . Company uses bond sale proceeds for stock buy-back. . Company thus increases EPS. . Company’s stock price increases as a result. . Company’s executives profit from increase in value of stock and options. . Pension fund profits from higher interest income and stock price growth. . All is well.....for a while.

Potential problems: In an economic downturn, the BBB bonds may be downgraded to junk, requiring the pension fund to sell the bonds. State tax receipts could be reduced, thus reducing pension funding source to buy bonds. And, a stock market drop further hurts pension fund returns.

altheqa
altheqa

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