Demographics and the Bond Market

Jun 7, 2014

- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
One of the biggest mysteries of market movements in the US and Europe has been record low bond yields despite rising stock markets. Historically, bond markets and stock markets have moved in opposite directions. When stock markets are rising, investors are more optimistic and so they pull money out of bonds. When investors are pessimistic, they invest in bonds as a safe haven and sell out of stocks.

But over the last few years, this pattern has broken down. Bond yields are at record lows (i.e. bond prices are at record highs), and stock markets are also at record highs. What is going on here? The answer reflects fundamental demographic changes in Western economies. In the US and in Europe, the population is ageing. The proportion of the population in retirement is continuously increasing.

What does an investor do when they retire? They typically cash out of risky stocks and invest in fixed income instruments like bonds. When pension funds have to pay out to their retirees, they end up holding more money in bonds and less in stocks. For this reason, the demographic shift towards an older population means that more money is allocated to bonds over time.

The best example of this is Japan. Japan has the lowest bond yields of any major economy in the world. They also have the oldest population in the world. The population ageing in Japan started earlier than the rest of the world, and the impact on the financial markets is clear. Money continues to flow out of stocks and into bonds. Over the years, bond prices have been very high in Japan, while the stock market performance has been poor.

The demographic changes mean that over the next two decades in the US and Europe, we should expect bonds to continue to perform well. Thus bond yields and interest rates should remain low for a long time to come, unless there is a dramatic shift in demographic patterns. In India, we have a much younger population and so we should expect stock markets to perform strongly over the next two decades, rather than bond markets.

In the Equitymaster club forum, we are asking the question: Where do you expect Bond markets to go in the next decade? We invite to you please login and post your views.

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is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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3 Responses to "Demographics and the Bond Market"

Mohan Iyer

Aug 5, 2014

The answer to the connundrum lies in the fact that the money belonging to Individual Savers Or Individual Investors do not matter any more to justify the "law of supply and demand". The money flooded from the fed at a very low interest rate to key players is the chief cause of this malfunctioning of all the economic theories.-Mohan Iyer

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Pradeep Kumar Nair

Aug 1, 2014

Hi

Are we assuming that the governments and economists in countries in Europe and Japan didnt know that their population is ageing for the last 25+ years and couldnt have guessed the outcome. Or did they make woolly eyed predictions that the old would continue a spending lifestyle while the young joined the gang, hence it would not affect the economy! Surprised if there were so naive :)

Pradeep

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amar

Jun 9, 2014

I don't understand what Assad is saying. It sounds like one of those Fed speak of Greenspan. If everybody or most people are aging and they want in Bonds then why is the stock market up? Who is buying stocks then in US? And then he misses another info that not only interest rates low in US, but people(not the parrots of Fed in media), believe that rates can NEVER go up without making everybody insolvent again. Even Bernanke said rates wont go up in his life time. Cheap opinion piece without proper research. Pls post my comment and don't discard so others know some more facts than what is said in above article.

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