Either the demographic bond models are broken, or yields are headed to 10%.

For fixed income fund managers it was once the case that if you understood the evolution of the relative sizes of the various cohorts of the young, the working, and the retired in a population, you could predict bond returns.  Lots of workers relative to the “unproductive” young or elderly meant low wage pressures, lots of demand for savings assets such as bonds, and lower government borrowing.  When workers became scarce, wages would rise, inflation would increase too, and bonds would sell off.  The demographically based bond models worked a treat in the 1970s, 1980s and 1990s.  But sometime around 2005 there was a complete breakdown in the relationship between bond yields and demographics.  Based on the model alone we’d expect double digit long dated gilt and US Treasury yields, rather than the 1.6% and 2.4% we have today.

In this, the latest in our series of Panoramic publications, I look at the old demographic fixed income models and examine why they used to work, and why they’ve been rendered useless by globalisation.

Please click here for the M&G Panoramic Outlook web page.


The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Jim Leaviss

Job Title: CIO Public Fixed Income

Specialist Subjects: Macro economics and fixed interest asset allocation

Likes: Cycling, factory records, dim sum

Heroes: Brian Clough, Morrissey, Neil Armstrong

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