-- Idanna Appio spent 15 years at the Federal Reserve Bank of New York analysing the history of sovereign debt crises. Now, as a fund manager at the $138 billion First Eagle Investments, she’s reached a conclusion: US Treasury bonds are too risky to hold.Jamie Dimon Says Succession at JPMorgan Is ‘Well on the Way’The call looks far beyond the timing of much-anticipated Federal Reserve rate cuts. It’s tied to a new era of faster inflation, higher government health spending and bigger deficits.
Recent evidence backs up the calls for urgency. South Korea’s birth rate is at a record low, both Italy and Germany have reported declining numbers, and there have been warnings from BlackRock Chief Executive Officer Larry Fink and investor Stanley Druckenmiller of a looming retirement crisis. When Fitch downgraded the US last year, it cited the costs of an aging population among its reasons.
Inflation tends to hurt bond investors by eroding the value of their holdings over time. That's because the fixed coupon income is worth less in real terms each year, while the bond itself can depreciate if central banks tighten policy to quell price pressures. “If we take China as the face of demographics, the future looks more inflationary,” said Pradhan, a former Morgan Stanley strategist and founder of Talking Heads Macroeconomics. “Almost every economy has green policies, and deglobalization has meant more armed forces spending. There is a willingness to stimulate demand and China is not able to offset that demand quite as adequately as it did in the past.”The United Nations predicts that one in six people will be aged 65 or more by 2050.
“Even at retirement, we’re advocating for clients to have 50% or more in equities,” he said. “Most people undersave and so they need that equity risk.” Markets “can be slow to price in the impact of even predictable demographic shifts,” Jean Boivin, head of the BlackRock Investment Institute, said in a note last month. Plus, the world isn’t ageing at exactly the same pace and outcomes will vary.