NAPF: Bank of England warns of risks in search for yield

UK – The Bank of England has warned about risks in the search for yield – and says it wants to extend its dialogue with asset managers on such topics.

“The search for yield – just about everybody on the planet is looking for it,” said Paul Tucker, a BOE executive director and member of the interest-rate setting Monetary Policy Committee.

He told the National Association of Pension Funds’ annual investment conference in Edinburgh: “Very often when people search for yield they mis-price risk and forget it.”

“The key question is what should the allocation be between equities and bonds,” Tucker argued. He also said he saw deeper questions about whether the pension industry was a “material participant” in the inflation swaps market “in order to hedge long-dated real defined benefit pension liabilities”.

He added: “Is some allocation being given to the options embedded in long-term liabilities? We certainly don’t pretend that we know.”
“To what extent is use being made of wider asset classes?”

Tucker said he also wondered why the industry hadn’t made more use of gilt strips to date. “That’s something I've never completely understood.”

Overall, he noted that the Bank of England wished to extend its dialogue with asset managers: “It doesn’t go far enough. “We can’t begin to do our jobs without understanding broader financial markets.”

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