Yet when they do many schemes will be even more persuaded to sell equities and buy bonds

Posted by admin · · Jump to comments

Yet when they do, many schemes will be even more persuaded to sell equities and buy bonds. If the consequences of this dementia were not so serious, it would be almost laughable. Satisfy the demand! Give us more index-linked stock, yell the markets Just what the Government wanted. Supporters keep flocking and promises of new prawn farms, repaved roads, and redredged canals are keeping them happy."I want officials to see and understand my way of thinking," said Mr Thaksin, whose strongest political base is made up of Thailand's rural poor.Mr Thaksin's latest gambit has left him vulnerable to mockery from his opponents, who condemn the television show as a wasteful display of bad taste.But there's little chance the Prime Minister will be voted out in the foreseeable future, even though protesters demanding his resignation stormed the Thai parliament on Friday. Accounting changes mean that future pension liabilities previously discounted by expected returns on all pension assets, are now discounted by long-term bond yields. Limited supply in combination with explosive demand equals disaster, for the pension funds that is, if not the Government, which seems almost deliberately to have rigged the market to borrow money at ever cheaper rates.As if these distortions were not already mad and bad enough, just consider the following point, made yesterday in separate research by Goldman Sachs and F&C Asset Management. Yet there is nowhere near sufficient quantity of them to go around.

If the demand were real, that would be one thing, yet it is largely artificial, the result of misguided solvency regulation which forces pension schemes to match their future liabilities with "safe" investment assets such as bonds.The instrument of choice is index-linked bonds, as these give protection against future inflation. Why is this? Are we even more in the grip of the mad hatter's tea party than our friends overseas Why yes I fear we are. The primary cause of this distortion is insatiable demand from Britain's big defined-benefit pension funds. Have lenders wholly taken leave of their senses? Can money ever have been so cheap? Real bond yields are now at startlingly low levels, so low that conventional analysis would point to a serious recession, or even depression in the making.

As Mr King pointed out in a speech this week, exceptionally low long-term interest rates are not confined to the UK Real yields have fallen the world over. The position in the UK is as much explained by global factors, in particular the transformation in supply and demand brought about by strong growth in China and India, as domestic ones.Yet they have fallen by more in the UK than almost anywhere else. The Governor of the Bank of England, Mervyn King, doesn't pretend to know the answers either. Yet whatever the explanation for ever lower bond yields, one thing is clear enough: they've lost all touch with reality. Since the beginning of the year, the yield on the benchmark 50-year gilt has virtually halved. After another sharp fall in the past few days it stands at less than 0.5 per cent, which just to give this Alice in Wonderland state of affairs its true significance means that investors are lending for 50 years at an annual rate of interest of under half a percentage point.