Get Ready for Great Bond Bust of 2020By
Gavekal’s Will Denyer shows savings patterns linked to yields
Coming shifts in savings suggest game changer looming in 2020s
The “global savings glut” is perhaps the most famous theory behind the three-decade slump in bond yields. That glut has stopped growing, and will start shrinking in a few years, in a potential game changer for markets, Gavekal Research Ltd. analysis indicates.
What propelled the glut was demographic patterns in big economies that saw a surge in the share of people aged 35 to 64, which tend to be years of high savings, Will Denyer, an economist at Hong Kong-based Gavekal, wrote in a report this month. When those demographic patterns reverse, the implication will be potentially “big rate rises” and the risk of a “major fall” in global equity valuations, he wrote.
A simple calculation of the outlook for the “capital provider ratio,” -- measuring the number of 35-to-64 year olds divided by the number of people outside that bracket -- suggests that the world’s saving propensity will drop in a decade’s time, according to Denyer. A more refined measure looks at weights for narrower cohorts of people -- just five years -- which would capture the implication of a greater number of 60-to-64 year olds (who are saving less) than 46-to-50 year olds (who save “a lot”), the study showed.
In the more refined analysis, saving propensity falls rapidly after 2020.
Benchmark 10-year U.S. Treasury yields have averaged 3.74 percent over the past two decades, compared with 8.97 percent over the previous 20-year period. They were at 2.33 percent in New York trading Tuesday.
“In the next few years, demographics will be neutral for interest rates and asset prices,” Denyer wrote. “Hence a balanced portfolio should still do well. But managers should reduce the duration of bond holdings, to avoid risk from rising rates in the 2020s.”
The analysis suggests a shift from the balanced portfolios of equities and longer-dated bonds that have done well since 1982, he wrote. Back in the 1970s, when inflation-adjusted interest rates were high, three-month Treasury bills “consistently outperformed both equities and bonds,” he noted.
“Demographics did indeed provide substantial support for higher equity valuations from 1980 until today,” Denyer said in the report. But the sharp decline in the refined capital provider ratio after 2020 “means that equity valuations could sustain their present levels for a few more years, but then risk a major fall.”