As the working population ages, more money gets put away, which in turn also helps drive yields lower. Pension funds among countries in the Organization for Economic Cooperation and Development, for example, have reached a record $25 trillion.
"There are a lot of very negative feedback loops," Credit Suisse Chief Executive Officer Tidjane Thiam told the audience at the Bloomberg Markets Most Influential Summit in London this week. "There's been a glut of savings that impact real interest rates. You can't make any money on the assets, and the liabilities explode. People born in 1968 and the following 15 years will have an enormous pension deficit because they've made nothing on their assets."
Jim Leaviss, who helps oversee about $374 billion at M&G Investments in London, argues that the world demographic picture suggests bond yields should be much, much higher than they are. In the past, projecting population changes gave you a good guide to what economic growth would do, how labor-market supply would affect wage demand and inflation, and how demographics would affect production versus consumption of goods and services.
Those economic indicators in turn told you where bond yields would likely settle. Using that model, Leaviss says the 30-year U.K. gilt yield, for example, should be closer to 12 percent than the 1.4 percent the government currently pays to borrow for three decades, with U.S. Treasuries similarly mispriced:
Nergaard Berg estimates that standardization of sub-sea forgings alone—the massive steel spools used in deepwater drilling—has resulted in a 30 percent reduction in project lead times. Christie, of GE Oil & Gas, also reckons that standardization can lower drilling expenses by an average of 30 percent.
Singapore-based hedge funds outperformed Asian rivals during the first seven months of the year thanks to a greater focus on India and global markets, according to data provider Eurekahedge Pte.
Funds headquartered in Singapore returned 2 percent through July, while Hong Kong-based funds declined an average 2.3 percent, Eurekahedge said in a report Tuesday. Funds based in Australia rose 1.9 percent, while Japan-based funds declined 2.5 percent, the report said.
Bank of Japan has radically shifted how it will purchase exchange-traded funds (ETFs) in Japan's stock market.
the BOJ said after its policy-setting meeting on Wednesday that now 3 trillion yen of its purchases would still be divided among ETFs based on the three indexes, roughly proportionate to the ETF's total market value.
But the central bank added that the remaining 2.7 trillion yen would be aimed only at funds tracking the Topix index. It said the 300 billion yen allocated to ETFs tied to "supporting firms proactively investing in physical and human capital" would be unchanged.
In a note on Wednesday, analysts at Nomura estimated the change meant around 70 percent of funds would be allocated to the Topix index, 28 percent to the Nikkei and 2 percent to the JPX Nikkei 400, compared with an estimated 42 percent, 53 percent and 4 percent respectively, previously.
That was a likely driver of the Topix index's outperformance on Wednesday, when it closed up around 2.7 percent, compared with the Nikkei's 1.9 percent gain. Japan's markets were closed Thursday for the autumnal equinox holiday.
Nomura expected the biggest gainers from the change would likely be among the low-liquidity small-capitalization stocks included in the Topix.
Turning off even the most willing first home buyers was the $1.510 million sale of the 40-year-old unrenovated one-bedroom apartment at 6/166 Queen Street, Woollahra, in Sydney's eastern suburbs on Saturday morning.
The 70 sq m apartment broke the suburb record at $21,571 a square metre and its auction attracted the who's who of the eastern suburbs.
Only time will tell if central banks are able to find creative solutions to normalizing interest rates without a disastrous side effect like a bond panic or a yield curve inversion. In the meantime, investors have been allocating away from equities and into bonds all year, with bond funds adding $189 billion in assets year-to-date.
Within bond strategies there is a flood out of alternative credit and more nontraditional areas of the market into the lowest-yielding — even negative-yielding — high-quality areas. The bond pile-up is alarming for several reasons, and one needs to examine all the pieces of the puzzle to see the bigger picture.
The first piece is the commoditization of fixed income. Warren Buffett’s quote comes to mind here: “The problem with commodities is that you are betting on what someone else would pay for them in six months. The commodity itself isn’t going to do anything for you. ...” Today negative-yielding bonds more closely resemble commodities.
Bonds have long served as the anchor in a conservative portfolio: a safe haven asset with an income component designed to produce a consistent return stream. As the amount of negative-yielding debt exceeds $10 trillion globally, bonds increasingly cease to trade based on fundamentals, such as yield, in favor of what someone else will be willing to pay for them in the future. For a prime example, look no further than 4 percent Swiss government bonds maturing in 2049. Today these bonds trade above par at more than $130, giving them a negative yield. With premiums of this magnitude, bonds are effectively commodities, and investors are using the greater fool theory as an investing strategy.
The next piece of the puzzle is the false perception of a high-yielding U.S. Treasury market. Compared with the negative nominal yields in Japan and parts of Europe, the yield on U.S. ten-year Treasuries appears attractive, trading at about 1.6 percent. Treasuries also look attractive compared with government bonds from other developed markets such as Canada, with 1.1 percent, or the U.K. gilt’s 0.7 percent or the 1.5 percent in South Korea. On a real basis, however, these yields are significantly negative as well. Adjusting for inflation, they range from –1 to –0.1 percent. Furthermore, at a real yield of –0.7 percent, the ten-year Treasury isn’t even the best house in what appears to be a very dangerous neighborhood for investors. From an endowment whose return target includes inflation to individuals planning on spending their retirement savings, this circumstance has significant implications for many investors.
The final piece is the question of how much control central banks really have over the situation. In our view at J.P. Morgan Asset Management, it is tenuous at best. Whereas central banks have shown they are extremely capable of driving rates lower, they have yet to show their ability to drive market rates up. Should we see more hikes from the Fed, what is to prevent a further flattening of the yield curve? Last year’s hike has already led to significant flattening. The difference in yields between ten- and two-year Treasuries is a mere 80 basis points. To put this situation in perspective, this figure was close to 300 basis points in early 2010 and, since the beginning of 2009, has averaged almost 200 basis points, which makes the current spread two standard deviations below the recent average.
So the Fed’s — and other central banks’ — choices are either to continue to push rates lower, a strategy that is proving to do nothing for economic growth and actually hurts financials, or to push rates higher with little impact on market rates and the added risk of creating panic in the bond markets.
Perhaps this is one reason why we’ve seen the Fed managing in accordance with market sentiment: interpreting essentially the same constructive stream of economic data differently, depending on where markets are at the time of a meeting. The bottom line is that in the wake of unprecedented quantitative easing, central banks have painted themselves into a corner and lost their ability to alter market rates.
So where does this leave us? One way or another, market forces will eventually prevail and return the income component to bonds. In the meantime, investors should consider diversifying into strategies with a much broader toolbox across traditional, alternative and private markets. This recommendation is because a long-only, best-ideas approach focused exclusively on public fixed-income sectors looks very limited on the upside and is acquiring a meaningful downside as the incongruence between economic data and central bank policy grows. A more constructive approach would be to allocate to strategies, not sectors: strategies that target a specific risk-return profile and take a relative-value approach across traditional, alternative and private markets from both a long and short standpoint, as well as lend liquidity in exchange for yield. This approach may be investors’ best bet at continuing to find attractive, risk-controlled returns while waiting for market normalization.
AALBORG, Denmark— Hans Peter Christensen got some unusual news when he opened his most recent mortgage statement. His quarterly interest payment was negative 249 Danish kroner.
Instead of paying interest on the loan he got a decade ago to buy a house in this northern Denmark city, his bank paid him the equivalent of $38 in interest for the quarter. As of Dec. 31, his mortgage rate, excluding fees, stood at negative 0.0562%.
MEET HANS PETER CHRISTENSEN AND HIS FAMILY
- Purchase price of their home in Aalborg, Denmark: 1.7 million Danish kroner ($261,000)
- Mortgage rate: -0.0562%
- Quarterly interest payment: -249 Danish kroner (-$38)
It has been nearly four years since Denmark entered the world of negative monetary policy, and borrowers and lenders alike are still trying to make sense of the upside-down world it has brought.
- Realkrdit Denmark, one of the nation’s largest home lenders, provided 758 borrowers with negative interest rates last year.
“My parents said I should frame it, to prove to coming generations that this ever happened,” said Mr. Christensen, a 35-year-old financial consultant, about his bank statement.
Denmark isn’t the only place where central bankers are experimenting with negative rates. The European Central Bank and the Bank of Japan, grappling with stagnant economies, are using subzero rates to stimulate growth. Switzerland and Sweden, like Denmark, are trying negative rates to keep their currencies in line with the struggling euro.
For the longest time, there have been two ways of “living” somewhere:
- Renting, in which case you own 0% of your residence
But why not own 91% of your house? 95%? 87%? Home ownership rates have been falling, partially because millennials can’t afford to buy homes — and when/if they can, they might find 300% of their net worth concentrated in a single asset class (i.e., the exact opposite of diversification) — their house.
- Owning, in which case you own 100% (typically using a bank mortgage as a 30-year crutch to owning all 100%)
There’s no such thing as a free lunch, and in this case Point’s lunch comes in the form of capital appreciation (more on the historical magnitude of this in a bit). If the house appreciates in value, Point shares in that upside. If the house depreciates in value, Point gets paid back after the bank, but before the homeowner, in the event of a sale. If the property depreciates enough, Point may lose some of its money, without the homeowner being in default; on the flip side, if the house greatly appreciates in value, Point will make far more than a traditional “coupon” from a mortgage. This type of equity-like exposure creates alignment between the homeowner and investor. There’s a terrific article on this subject in this Wharton article, “Don’t Reform Housing Finance — Reinvent It“.
On the opposite side, imagine you’re a big investor looking for capital protection and appreciation. There are few asset classes that have outperformed super-prime real estate in the last 60 years. Consider that the median home in Palo Alto sold for less than $20,000 in 1956, versus $2.5 million today — an appreciation rate of 12,500%. Compare that to an approximate 5000% return for the S&P 500 over the same period (much higher with dividend reinvestment, but you’d need to pay taxes on said dividends, making this calculation challenging).
Of course, for an investor to invest passively not in a single house but in a broad basket of homes would have been challenging, if not impossible. The investor would need to deal with finding and serving tenants, paying annual real estate taxes, and fixing toilets (maintenance) … across many, many properties.
Using technology, Point brings diversification to residential homeowners (diversify out) and investors (diversify in). It’s not like a home equity line of credit (HELOC) or a mortgage with monthly payments; it’s an aligned investment — that is, equity. It’s rethinking the fundamentals of residential real estate ownership — making single-family residential real estate a liquid, tradeable asset class.
China has opened up a new channel for insurers to invest in Hong Kong equities.
Insurance funds are now allowed to buy the city’s shares through an exchange trading link with Shanghai, the China Insurance Regulatory Commission said in a statement on its website, without saying when the funds could start using the link. The increased access will help the companies boost investment returns, it said.
The move comes less than a month after officials dropped the overall quota for mainland investors to buy stocks in Hong Kong and approved the opening of a second link via Shenzhen, while retaining daily limits. Insurers are allowed to invest up to 15 percent of their assets in overseas markets including Hong Kong, which they can currently do through a different program.
“It’s unexpected and positive for the Hong Kong market, though there are regulatory caps on how much money they can actually allocate," said Hao Hong, chief China strategist at Bocom International Holdings Co. in Hong Kong.
Chinese investors have already been showing more appetite for Hong Kong stocks. Net buying of equities in the city through the Shanghai link has swelled to average 4.7 billion yuan ($705 million) a day this week, exchange data show. Hong Kong’s Hang Seng Index has rallied 9.2 percent this year, compared with a 13 percent drop for the Shanghai Composite Index.
