- A research paper from the Bank of Japan argues ageing demographics will help underpin global bond demand.
- Japan’s ageing demographics have contributed to almost half of the 6.4% fall in inflation-adjusted interest rates over the past 50 years .
- The Japan example is noteworthy, given the structural shift underway in Western countries as baby boomers approach retirement age.
The prospect of rising bond yields has been front and centre in the outlook for global markets over the past month.
But a Financial Times report based on a research paper by the Bank of Japan suggests that ageing populations could play a key role in keeping bond yields lower over the longer-term.
The latest round of bond market uncertainty flowed from an unexpected jump in US wage growth in January that caused yields to spike, which in turn drove a serious case of stock market jitters.
Benchmark US 10-year bonds rose to 2.85% in early January and subsequently climbed above 2.9% — the highest level in more than four years.
Since then, stock markets have steadied somewhat but uncertainty around rising yields lingers, with numerous market experts forming the view that the end of the 35-year bond bull market is over.
And in turn, bond yields are likely to move higher — although no one can predict the pace at which they’ll rise.
With that in mind, the Bank of Japan research provides an alternate outlook for those looking to form a view as to where bond yields are headed over the long-term.
The researchers — Nao Sudo and Yasutaka Takizuka — said that ageing demographics will help to keep bond yields compressed.
It’s not all good news — with the pair noting how Japan’s older population has dragged on economic growth.
But that in turn helps to keep inflation in check — as pensioners tend to save more and spend less — while a subdued growth outlook creates demand for the safety of government bonds.
As a guide, Sudo and Takizuda said Japan’s ageing demographics accounted for around 2.7% of the 6.4% fall in inflation-adjusted interest rates over the past 50 years.
The FT cited alternative research by Barclay’s which suggests that elderly demographics will instead start to draw down their savings as they get older, which will put upward pressure on interest rates over the next decade.
But the BoJ analysts disputed that view. They argued that the increased proportion of older demographies is now permanent — which in turn will lead to a permanent shift in savings behaviour.
The net effect is that upward pressure on rates will be minimal — the pair said that future demographic trends will drive a broader rates increase of less than 1% by 2060.
Of course, Japan’s ageing demographic is particularly skewed towards the elderly — with low fertility rates and a stagnating economy.
But the research is still pertinent in the context of the demographic shift underway in most western countries, as the baby boomer generation approaches retirement age.
In the short-term, a number of factors are still in play which could put upward pressure on interest rates — particularly in the US.
Leading indicators point to more upward pressure on US wage growth, and the strengthening US economy has gotten a big fiscal boost in the form of the Trump administration’s tax cuts.
But taking a longer view, investors will need to factor in how ageing demographics in large western economies will have a structural impact on the outlook for interest rates.