The FT comment suggests that gilt rates are a political commentary from the financial markets. I learn at the start of this long weekend that we could be less likely for increases in rate rises because a man who is not yet an MP has spoken as the market wants him to.
Gilts have had their best week in two and a half years after Labour leadership frontrunner Andy Burnham pledged to stick to the UK’s fiscal rules and traders pulled back from bets on higher Bank of England interest rates.
People who cashed in their “pensions” a week ago will get a markedly lower payment from their pots than those who cash in next week, because most of us who are of an age to draw our money (most of us into our bank account) get a pay-out based on what the bond markets are paying.
I am not talking here about those who are advised and have wealth, I’m talking about the majority of savers who no longer associate their pension with an income but think of it as a “nest egg” which pays out to pay off a mortgage , meet the cost of the daughter’s wedding or pay the bills for the parents who are in private care. If I don’t understand why the pay outs vary from week to week, then how do we expect everyone else. Most people do not spend their time trying to learn how the bond market works.
Coincidentally, the ace-blogger of the FT, Stuart Kirk has an article that tops the reading list in the paper
Which is some comfort to my feeble mind. He explains that “simple” things that we can do by analysing gilts, such as extracting the implied inflation predictions of the market, are far too simple. I have been taught about this simple things by my friendly actuary, Chris Bunford as a way of pricing the purchase of CDC pension from day to day. “Long-term”? I find the volatility of the value of bonds, of the yield of their interest and the implications of these numbers to the cost of buying a pension anything but simple – but it is too simple (according to Stuart who gives me five things to consider before I understand bonds).
I’ll refer to his article and first the frightening volatility of bonds (I imagine he wrote this piece before the recovery of last week!). He starts with the explanations that are given about global economics and British politics.
The nuts and bolts of bond pricing are Chinese algebra in comparison. It’s beyond me. But I can see the simple mistakes other ignoramuses make. And five have popped up repeatedly as the bond rout intensified.
I will try and pick out the meat from the bones of this argument so we can understand what we cannot really understand. The five errors that we make are list
- that bond markets are omniscient or at least smarter than equity markets
- related to this is the error of comparing bond yields with earnings yields.
- that rising 30-year yields are due to bond investors losing faith in cash-strapped nations being able to reduce their sizeable debt-to-output ratios.
- to my conversation with my actuary, only surveys reveal what investors think inflation a decade down the road will be.
- the long list of complex factors that influence bond prices is also why inflation-linked bonds are not a substitute for measuring real yields. Conflating the two is the fifth misconception
I’m a humble fellow who has never tried to be an actuary or even try to understand what actuaries know, but I find myself in a job that gets me to explain to ordinary people why the pensions they get going forward will be invested not in corporate bonds and gilts but real assets like shares and infrastructure that over time deliver more than bonds. I was taught that in 1983 and though I’ve never understood it, it has done me well, I am still invested for my retirement in shares and not in bonds.
I have friends such as Con Keating who spent his life trading bonds and did very well out of understanding where the market got it wrong and betting against it. This is fine for a brain like his but he has given up trying to teach me how bonds work. I am glad that I am in the company of Stuart Kirk and more actuaries than would care to admit it. Bonds are bloody hard and should not be used to pay pensions if you’re open to new money and not in an end-game.
Here in the “sweet spot” of a DB or CDC fund benefits should be paid from the income of growth assets because the scheme has an infinite time horizon. The market value of a scheme’s assets is irrelevant. What matters is the increasing income over time which pays us an inflation linked wage for life. That I can understand which is why I want to be bold, be invested in growth assets and not bonds and take a very long view.
In this I am onside with some DC proprietors, Patrick being one of them. I hope he will come across to CDC with People’s Partnership! He must be as sick as me with the complexity of bonds and trying to understand them!
