The effect of an ageing population could be not only hurting investors’ liability assumptions, but the assets they use to match them, investment bank UBS has claimed.
In a paper entitled What is the Right Bond Yield? UBS analysts voiced their concern that countries with an increasingly older populace are seeing their inflation figures affected—and this in turn is hitting bond yields.
“We think insufficient attention is paid to demand-side ramifications of ageing populations,” the authors said. “These factors include the capacity of an economy with ageing demographics to generate higher credit and mortgage demand, to foster dynamism in consumer spending, and to provide sufficient savings to fund investment. These outcomes are important in the context of trend inflation.”
Many developed markets, including Japan and several European nations, are already struggling with a greater number of their citizens outliving previous generations and a falling birth rate. This imbalance is putting pressure on health care services—and the long-term goals of state pensions.
“A growing number of older people relative to younger cohorts will lower participation rates, and might, via other influences (e.g., lower regional mobility) lift the natural rate of unemployment. For a given level of demand, inflation will be higher.”
UBS argued that as inflation eats away at the future purchasing power of bonds, these nations need to be more aware of the possible side-effects. To compound the problem, pension funds are usually some of the largest buyers of domestic bonds, so double up on their inflation exposure.
“Ageing demographics, still-high global debt burdens, and their implications for trend investment and productivity growth have lowered global growth potential by more than is commonly understood,” the authors concluded.
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