GLOBAL – There’s no quantitative data on the impact of pension fund buying and longevity changes on bond yields, according to a new study.

“Recent regulatory and institutional developments may also have helped depress bond yields,” the International Monetary Fund working paper stated.

“Regulatory changes and the bursting of the equity bubble in 2000 have increased the demand of both life insurance companies and pension funds for long-dated bonds.

“Similarly, increases in longevity have raised concern over duration mismatches in both classes of institutions.

“However, although the qualitative impact of these changes on interest rates is clear, the data are lacking for an assessment of their quantitative impact.”

The 31-page paper is called ‘Perspectives on Low Global Interest Rates’ and was prepared by Luis Catão and George (Sandy) Mackenzie.

It argues that current levels of real interest rates on long-term bonds in advanced economies are not low by historical standards.

“It is the real long bond rates of the early 1980s through much of the 1990s that look anomalous.”

And it also finds that current global long-term interest rates are “roughly in line with what one would predict given current price-earnings ratios and under reasonable assumptions about the equity risk premia and the expected rate of growth of earnings in advanced countries”.

And it provides econometric evidence that global long-term interest rates are “significantly affected” by commodity prices, expected productivity growth, and fiscal consolidation in advanced countries.

Topics