Friday, July 5, 2013
It seems like pensions are having an allergy to bonds. It makes perfect sense given the low yield levels and the current sell-off, but pension funds that move to greater equity holding have another problem. They will face greater uncertainty with their expected rate of return. Those expected rates of return have generally not come down, so there is a risk that pensions will not be able to meet their return targets. Of course, they would not have been able to meet their targets if they held low yielding bonds. This allergy to bonds will go on. Pensions are slow to react.
A bond allergy can lead to a greater pension sickness.
The ECB and the BOE have both provided forward guidance concerning interest rates. The ECB has always said that they would not precommit to a policy. I guess that has changed.
They will stay low for a long-time. Should we be surprised here? Is this really forward guidance? Forward guidance has become an important part of the monetary playbook as espoused by academic monetary economists and the Fed. Guidance can reduce the uncertainty about the direction of central bank policy and can change market expectations. However, this is based on whether there is actually good information or guidance provided. At this time, it is hard to say that what was said is new information.
This is an effort to stop the rise in global rates without actually doing something. The sell-off in US Treasury is having global implications.