Quantitative Squeezing

Bond yields have declined steadily for thirty years. As long-term and mid-term bonds expire and get rolled over at lower yields, pension funds generate much lower returns on their bonds portfolios. State and local funding for public pension funds has not kept pace with this market reality. Graphic credit: Wall Street Journal.

Bond yields have declined steadily for thirty years. As bonds expire and get rolled over at lower yields, pension funds have been generating lower returns on their portfolios. State and local funding for public pension funds has not kept pace with this market reality. Graphic credit: Wall Street Journal.

It’s nice to see mainstream media highlighting an issue that I’ve been hammering here at Bacon’s Rebellion for a couple of years now. A front-page Wall Street Journal article discusses how the zero-interest rate policies of central banks around the world are crippling returns on pension portfolios, making it difficult for nations and municipalities to meet their obligations.

Among the numbers cited in the article… Global pensions on average put roughly 30% of their assets in bonds. Investment-grade bonds that once yielded 7.5% a year now deliver almost no income at all. Low rates helped pull down assets of the world’s 300 largest pension funds by $530 billion in 2015.

The California Public Employees’ Retirement System (CALPERS) posted a 0.6% return in fiscal 2016. Its investment consultant, reports the Journal, recently estimated that annual returns will be closer to 6% over the next decade, shy of its 7.5% annual target.

If CALPERS is ready to admit that investment returns will remain depressed over the decade ahead, maybe it’s time for the Virginia Retirement System to do the same. The VRS assumes a 7% annual return on its portfolio — not as divorced from reality as many states, but significantly more than justified by bond returns. The problem, of course, is that acknowledging reality will expand Virginia’s public pension unfunded liabilities by billions of dollars — and nobody knows where the money will come from. So, we’ll pretend the problem doesn’t exist… until it becomes a crisis.

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One response to “Quantitative Squeezing

  1. What’s ignored here is the fact that loans for homes and cars and property even are now dirt cheap – and the stock market is going great guns – and many folks have the ability to “adjust” their investment portfolios toward things that earn more …

    and infrastructure – schools and roads – paid for by taxpayers are also dirt cheap – and some localities are re-financing their existing debt and undertaking major new infrastructure (like Henrico is) – when borrowed money is as cheap as it has been in decades – especially for localities with AAA ratings!

    I still think there is some confusion over cause and effect.

    Demand for loans is down – many companies are not borrowing money for capital – they’re self-financing , pay as they go.. because aggregate demand is down – and as stated above – localities are also borrowing money at the lowest rates in decades – and that helps keep taxes down..

    it’s not all downside…

    The demand for capital will increase – when companies are seeing increases in demand for products and services… and want to expand to meet than demand.

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