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Macroeconomics

21 May 2019

WILL BOND YIELDS REMAIN LOW FOREVER? 

With 10-year Bund yields again dropping below zero recently, investors are increasingly starting to doubt whether they will ever see a decent return again on their savings. The future may not be as bleak as it now seems when we take into account that demographics play a large role in the global supply and demand for savings, and hence on global interest rates.

People are net capital consumers when they are below 35 years old and when they are past 65 years old, while they are net savers between these ages. Past the age of 70 people become heavy capital consumers and as the huge baby-boom generation ages, more than 3 million people will turn 70 every single year in the years to come in the US alone. When the boomers were predominantly between 35 and 65 years old they built up a mountain of savings, the famous ‘global savings glut’ that former Fed Governor Bernanke lectured on in 2005. This savings glut may be the main cause of the structural pressure that we have witnessed on bond yields since 1980.

However, the trend in global savings seems to have turned as baby-boomers have started to retire in droves since 2010, when the first boomers reached the age of 65. Adding up the savings of the age cohorts of the net saving age (35-65) and deducting the capital consumption of the net capital consuming cohorts, research organisation Gavekal calculated a global capital providers ratio for the world’s top 80 countries in terms of GDP.

For the world as a whole the ratio peaked in 1980 and has fallen ever since, until it bottomed out around 2015. Having stayed close to the bottom in recent years, a sharp rise is expected for decades to come. There will of course be emerging markets like India and Brazil that will still see their capital providers ratio improve, but they will be no match for the baby-boom generation of the developed countries. The problem with long-term trends like these is that it is difficult to pinpoint the exact turning point, which may also be slow to develop.

However, it would seem that demographics do not support the idea that saving rates will remain around zero for years to come.