Speaking at ETF Stream’s Big Call: Fixed Income event on Monday, Christopher Peel (pictured), CIO at Tavistock Wealth, believes this issue could be “catastrophic”.
“The regulators and the actuaries need to engage and look at a cash plus equity rebalance in pension funds because its one thing to match liabilities, but if you’re locking in a loss, it isn’t allowing people to spend money in retirement,” said Peel.
He believes having to buy bonds with a negative yield and only being able to make a positive return if someone is willing to pay more is like a “Ponzi scheme”.
“You’re buying something and you’re losing money, but the out-trade is someone is willing to pay a higher price down the road.”
“Ultimately, the quantitative easing process is only a third of the way through. Until central banks reduce their balance sheets, unless it coincides with fiscal surpluses and a lack of bond issuance, the clearing rate for yields for refinancing the existing amount of date held by central banks is going to be at higher levels."
He says this is going to cause huge losses for bond portfolios. Investors which prioritise fixed income assets are likely to lose 10-20% of their capital as a result, and are not likely going to live long enough to break even again.
In spite of that Ponzi scheme element, Peel doesn’t argue that rates will stay significantly low for a long period. "Rates will only rise once we see a recovery to the global economy. Inflation will be the catalyst for repricing of the bond market, but it is hard to tell when this will be."