Macro Matters: 70 Is the New 65

Macro Matters: 70 Is the New 65
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Macro Matters: 70 Is the New 65

As my colleague Matt Tracey and I explain in a recent In Depth piece (available here ), demographics support PIMCO’s macro view of “lower rates for longer” as high earners work and save later in life. Our argument in a nutshell:

Some observers believe that global demographic trends have taken a dramatic turn that will have a profound impact on interest rates.

Specifically, they say we’ve just gone over a demographic cliff: that the ratio of high-saving adult workers to dissaving elderly is now declining. As a result (the argument goes), the global savings glut will reverse as the demand for saving falls, pushing the global neutral interest rate higher. Furthermore, baby boomers in the U.S. will compound the problem as they sell their financial assets (including bonds) to fund retirement consumption, driving U.S. fixed income yields higher.

This would be disquieting news for investors … if it were really the case.

At PIMCO, however, we challenge this traditional thinking about the timing of the feared “demographic cliff.” We believe a demographics-induced structural rise in U.S. interest rates remains at least a decade away. Global demand for saving should remain robust, supporting a low global neutral interest rate (the “anchor” for U.S. fixed income yields).

Demographics studies focused on traditional dependency ratios – which use fixed, static age definitions to chart the ratio of high-saving adults to elderly across many decades – are flawed because they fail to account for a powerful trend: rising longevity. U.S. elderly, especially the highest earners, are working and saving later in life. 70 is the new 65. And these high earners matter a lot because they drive the lion’s share of global saving. Our analysis finds that demographic support for saving may be as strong over the next decade as it has been over the past several. Possibly stronger.

It’s not just the U.S., either: Similar trends can be observed in other economically significant economies. This continued strong saving demand should support a low global neutral interest rate in the coming years – and should continue fueling the global savings glut.

And in financial markets, strong U.S. demographic demand for fixed income assets should – all else equal – help maintain low U.S. bond yields over the next decade. The lion’s share of U.S. household financial assets is held by age groups who will seek to grow, not sell, their fixed income allocation over the next ten years. (Think: lots of people in their 60s and early 70s who need to de-risk their portfolios.)

Combine a low global neutral interest rate and strong domestic demographic demand for bonds, and what do you get? Lower rates for longer in the U.S. – and no demographic cliff in sight.

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