As the chart above shows, even buying longer-dated securities sold by KfW hasn’t offered much protection from the relentless downward momentum of interest rates. The 36,250 euros of annual income a fund could have received by buying 1 million euros of 10-year bonds a decade ago ended when those bonds were repaid in January.
Oh, and that five-year issue KfW sold in January that pays zero interest? It trades at about 101.25 for a yield of -0.26%. In other words, a pension fund buying the notes today is absolutely guaranteed to lose money if held through to maturity in 2025.
There’s little prospect of yields and interest rates on fixed-income securities heading higher anytime soon what with the world’s central banks restarting and escalating their various bond-buying programs — the Federal Reserve even going so far as to lend support to companies that have recently dropped into the junk rating category.
It’s a far worse scenario than what happened in the last financial crisis, as Anthony Peters, an independent market consultant, points out. “In 2008, investment portfolios were still full of legacy fixed-income portions which paid a proper income and which largely covered the dip in dividends,” Peters wrote in his daily email note this week. “They’re gone now and have been replaced with, in the case across Europe, bonds with no to negative coupons.”
Retirees, both current and future, need money on an ongoing basis. It’s helpful if the particular funds they’ve invested their nest eggs in beat the relevant benchmark, but absolute returns count for more than relative performance.
The current drop in income as companies suspend their dividends comes at an even worse time for pension funds than during the global financial crisis. Our working lives probably just got even longer.
Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable."