In the depths of the financial crisis, Warren Buffett showed a “really extraordinary” slide to those who had gathered to hear him speak at Berkshire Hathaway’s annual meeting.
The slide revealed how the conglomerate had in December 2008 sold $5m of Treasury bills for $5,000,090.07 despite the debt maturing just a few months later. In other words, at a negative yield — a phenomenon so bizarre that Mr Buffett felt it deserved highlighting.
“You’ve got . . . less for your money from the US Treasury than you got from sticking it under a mattress,” he marvelled to the audience. “I’m not sure you’ll see that again in your lifetime. But it’s been a very extraordinary year.”
Mr Buffett might have been right about sub-zero yielding Treasuries being a brief phenomenon. But the concept of negative yielding debt has become a reality elsewhere, thanks to negative interest rates and central banks’ bond-buying programmes.
However, the tide of angst about the unintended consequences is rising. While much of the opprobrium heaped on central banks is unfair — there is no God-given right to earn a fat return from safe bonds, and central banks must do what they think best to support their economies — some of the fears are well-founded.
Concerns have focused on the pain negative rates might be inflicting on the banking system. European bank stocks are down by almost a third since the ECB introduced negative rates in 2014, and Japanese ones are down by more than a fifth since the BOJ followed suit in 2016. There are few signs that economies are healthier as a result.
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Yet the real damage is surfacing in another corner of the financial system. The pension industry is caught in a tightening vice of lengthening life expectancies and falling expectations for investment returns. It is this pension predicament that may also explain why sub-zero interest rates are not having the stimulative effect central bankers intended.
Bonds are the bedrock upon which large parts of the global pension system is built. Although the rally in bonds and stocks since the financial crisis has lifted the value of pension funds’ holdings, what they really care about is generating the returns to match their future liabilities. With bond yields beaten down and equity markets have rallied for years, the ability to harvest those returns looks grim.
Stichting Pensioenfonds Zorg en Welzijn is a case in point. The second-biggest Dutch pension fund generated €39bn of investment gains in the first nine months of this year, but no one at PFZW is celebrating. “You would think that we are on the right track. However, the reality is different,” Peter Borgdorff, its director, wrote in a bleak blog post earlier this month.
