Vanishing Sovereign Bond Yields Around the Developed World

The ageing baby boomers have been a demographic drag for the entire developed world. They were a catalyst for bull markets in the 1980s and 1990s as many got married, had children and acquired larger homes, cars and other significant forms of consumption. However, as the boomers age and become empty nesters they have downsized homes, cars and several other aspects of their spending.

Accordingly, even central bank initiatives offering money at very low rates may not be enough to compel them to spend or invest. As a result, the developed world seems mired in a period of anemic growth absent more individuals to offset the boomer consumption decline. This shortfall may be difficult to reverse in the near term.

Greg Ip’s “How Demographics Rule the Global Economy” article in the Wall Street Journal (from 11/22/15) notes that 2016 represents the first time since 1950 that the combined working-age population of developed nations will actually decline. By 2050 the United Nations projects this figure will shrink by 5%. It becomes increasingly difficult for economies to grow and equity markets to rise when there are less employed people to drive that growth.

Even initiatives to boost birthrates may not be sufficient as the positive impacts may be a generation away. While there are no uncomplicated answers to this clear trend, one of the options to stimulate growth is to add people via immigration from developing nations. This may present a host of cultural, linguistic and possibly religious challenges and is not without controversy.

Related: Are Interest Rate Hikes ‘Back on the Table’?

The Guardian newspaper pointed out in its 8/22/15 “Europe needs many more babies to avert a population disaster” article that the German government expects their population to plummet from 81 million to 67 million by 2060 based on current birthrates. Accordingly, they would need 533,000 immigrants annually just to maintain the current population level. This likely provides context as to why Germany accepted an estimated one million Syrian refugees in 2015 and hundreds of thousands more this year.

With no near term solutions to the demographic drag on growth, central banks are likely to keep interest rates lower for much longer in order to entice an aging cohort to spend or invest more.  As rates remain low, and corporations struggle to sustain both the top and the bottom line, the relative appeal of bonds could conceivably increase. As a result, negative long term yields may be a reality for the balance of the decade and possibly longer.

Hafeez Esmail is the Chief Compliance Officer at Main Management, a participant in the ETF Strategist Channel.

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