An ageing US population is as great a force on treasury yields as any move from the Federal Reserve to hike interest rates, according to rating agency Moody’s chief economist.
John Lonski set out a range of pressures on the US 10-year government bond in his latest paper and signalled a less-than-stellar trajectory for yields in coming years.
“The rocket fuel needed for a lift-off by interest rates is lacking,” wrote Lonski. “Rather than soar like a Saturn rocket, the trajectory of interest rates is more likely to resemble the gentle slope of a wheelchair ramp.”
This analogy dovetailed nicely, the economist said, with one of the pressure points on yields—“the unprecedented demographic change that is unfolding.”
Source: Moody’sThe average annual increase in the number of Americans aged
16 to 64 years is expected to plunge from the 2 million of 1965 through 2007 to
just 570,000 during the next 10 years, Lonski said. This meant there would be “a
dramatic shift toward a grayer America”, with the average annual increase in
the number aged 65 years and older projected to soar from the 450,000 of 1965
through 2007 to 1.74 million over the next 10 years.
This changing face of the US is likely to hit its productivity, Lonksi said. Over the 25 years to the end of 2000, real GDP expanded by an average annualized 3.4%. With this new demographic in place, in the 10 years to the end of 2025, the US’ real annual growth rate should be in a range of 2% to 2.5%.
“Productivity growth can compensate for a deceleration by labor force growth,” wrote Lonski. “However, the 10-year average annualized rate of labor productivity growth has sagged considerably from the 2.8% of the span-ended 2004 to the 1.5% of the span-ended 2014. The reasons for this deceleration probably extend well beyond tax and regulatory issues.”
However, Lonski warned readers not to be too down-hearted.
“Though impossible to pinpoint, history shows that productivity growth has invariably received an unexpected boost from the introduction of new products that effectively utilize labor more efficiently,” he concluded.
Given this last statement, there may be some coincidence that the first Apple Watches are set to be shipped today.
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