QE May Have Transformed Government Bonds Into ‘Return-Free’ Risk

Quantitative easing has distorted markets and made it riskier to hold government bonds that have been traditionally regarded as havens, according to a former U.K. pensions minister.

“Central banks have interfered with the risk-free rate and, to some degree, have made the conventional risk models less reliable,” Ros Altmann, a member of the U.K.’s upper house of parliament, said in a speech to the Economic Research Council last month that was released on Thursday. “Do sovereign bonds now offer risk-free returns or return-free risk? The jury is out.”

Quantitative-easing policies, introduced after the outbreak of the global financial meltdown a decade ago to ward off deflation, have persisted even as economies recover. The policy has pushed bond yields to record lows, with some rates falling below zero. That’s causing pension liabilities to balloon and, according to its critics, it has worsened inequality by boosting assets held by the wealthy, from housing to equities.

Pension deficits among FTSE-350 companies reached the highest ever last year as the U.K. vote to leave the European Union prompted the Bank of England to reduce rates further and buy more assets. That added to pressure on pension funds, with Royal Mail Plc in April becoming the latest British company to announce plans to scrap its defined-benefit pension scheme, following in the footsteps of Tesco Plc.

“QE distorts investment decisions and makes it more difficult to devise appropriate asset allocations,” Altmann said.

The policy may have contributed to the increase in populism that prompted voters to opt for Brexit in Britain and led to Donald Trump’s victory in the U.S. presidential election, Altmann said. “The unintended consequences of QE could be not just financial or economic, but also social and political,” she said.

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