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Negative Rates Series: Negative yields likely to hurt pensioners the most

The chart shows clearly how the pension deficit has ballooned in the United Kingdom to £300 billion with the fall in the gilt yields. It shows despite assurances from the central banks from the developed world, pension deficit and long-dated bond yields are highly correlated. While the central bankers may argue that the pension funds are sitting on accrued paper gains on their bond holdings, but it is a clear fact that there are troubles ahead.

Even if the funds sell the fixed income assets to lock in gains there are reinvestment risks they would have to handle and selloff could lead to an asset-liability mismatch. However, it isn’t the UK pension funds who are facing massive yield shortages but across the developed world, especially in Europe. Pension funds could tap into longer-dated bonds in Switzerland, but even if they go for a 50-year bond they would still be earning negative yield.

Most of the pension funds will not be delivering returns as promised in a world where $13 trillion bonds are trading in negative. Even Italy, where a Banking crisis is brewing is returning in negative for some maturities.

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