Will baby boomers be savior of bond market?

As they reach retirement age and become more risk averse, boomers will fuel demand for fixed-income securities

Jan 9, 2017 @ 11:48 am

By Bloomberg News

Investors mourning the end of a 30-year bull market in U.S. Treasuries can take solace from demographics: Thanks to the aging population there's a limit to how high yields can go.

Over the next decade, as more of those born in the baby-boom period following World War II get closer to drawing their pensions, global demand for bonds and cash will rise and allocations to equities will fall, according to analysts at HSBC Global Research. That's because people get more risk averse as they get closer to retirement, shifting out of stocks and into fixed-income investments.

(More: Charts say bond bull market has gasped its last breath)

The generation now approaching retirement is both bigger and wealthier than all the other age groups in most of the developed world. So even if cyclical factors such as rising inflation in the U.S. boost the mid-term appeal of stocks over bonds, the longer-term demand for fixed income will remain high, according to Fredrik Nerbrand, global head of asset allocation at HSBC Bank Plc in London.

“If you believe in 'follow the money,' you need to follow the baby boomers,” Nerbrand said in a phone interview. “Bond yields may not revert back to their historical averages even if inflation were to rise because the structural story is still there.”

(More: Stocks versus bonds: Which best help meet retirement goals? )

Tremors in the bond market have renewed interest in an argument that the graying of large portions of developed-market populations will help support bond prices. Jim Leaviss at M&G Investments in London argued in a research note in December that while demographics have helped to push down bond yields in the past, the link has been distorted by factors like government stimulus since the financial crisis and globalization changing the shape of the labor force.

LARGER SLICE

The global population aged 60 or over is growing at a rate of 3.3% a year, and in Europe, that age group already makes up 24% of the total, according to the United Nations 2015 World Population Prospects report. As the ranks of those entering retirement age swell, they are taking a larger slice of the economic pie, with baby boomers in the U.S. now holding more than 45% of the total wealth pool, HSBC said in a report.

Pension funds in member states are already allocating more than 50% of their holdings to bonds, according to an Organisation for Economic Co-operation and Development study released in June. HSBC forecasts that U.S. allocations to equities will drop by about five percentage points by 2030, offset by a small increase in bond holdings and a larger increase in cash.

That doesn't mean Mr. Nerbrand is betting on bonds in the short term. In the current cycle, with the Federal Reserve set to raise interest rates at a faster pace this year and Donald Trump's spending plans set to fuel inflation, the place to be is equities, he said.

“There are times when you don't want to be long bonds from an asset allocation perspective,” Mr. Nerbrand said. “But generally we would suggest that there is still a structural demand over the next five to 10 years that favors bonds rather than equities.”

0
Comments

What do you think?

View comments

Recommended for you

Featured video

INTV

Advisers beware: tax law has unintended consequences

Commission accounts could be preferable for some clients, and advisers could be incentivized to move from employee broker-dealers to independent channels.

Recommended Video

Path to growth

Latest news & opinion

El-Erian warns advisers on ETF liquidity

If investors decide to exit exchange-traded funds en masse, things could get nasty, economist says.

Pass-through provision in new tax law could benefit REITs, MLPs

Investors in such instruments are eligible for a 20% tax deduction as a result of the pass-through provision.

Fidelity charging new fee on Vanguard assets held in 401(k) plans

The 0.05% fee is ostensibly a response to Vanguard's distribution model, but may also make the company's funds less attractive due to higher cost.

UBS adviser count continues to decline

Firm to merge U.S., global wealth management units on Feb. 1

TD Ameritrade launches all-night trading for ETFs

Twelve funds now can be traded after-hours, but the list will grow, company says.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print