Saturday, July 5, 2008
Confused Pension Funds
"Pension funds and other long-term investors have been finding it increasingly difficult and expensive to protect themselves against rising inflation over the past few weeks. The reason is that bonds linked to inflation are in desperately short supply at a time when the needs of pension funds and expectations for a rise in the price of food, oil and other goods have ramped up demand for the bonds. ... The surging demand in the past few weeks has helped to drive yields on indexed-linked bonds to new lows and pushed rates higher in the inflation swaps market, where long-term investors go in search of protection against inflation. ... The difference between the yields on nominal bonds and those from inflation-linked issues--known as the break-even rate--reflects demand for protection against rising inflation. That rate has widened dramatically over the past few weeks as demand has jumped. The 20-year break-even rate has risen to 4.16 percentage points from 3.98 percentage points June 6, while the 10-year rate break-even rate has jumped to 3.83 percentage points from 3.56 percentage points June 6. ... The U.K.'s annual inflation rose to 3.3% in May from, 3.0% in April, its highest level since 1992. ... The U.K. government's Debt management Office is stepping in with a record L18 billion in inflation-linked bonds this fiscal year, but that's nowhere near enough to satisfy the demand from pension funds", WSJ, 25 June 2008.
Here's an opportunity for Hank Paulson (HP). Issue TIPS denominated in British Pounds. Modern Roosa Bonds, see my 8 November 2007 and 14 January 2008 posts. I wouldn't touch 'em, but they seem to have a ready market. For a small fee, Goldman Sachs (GS) might sell them. Everybody makes money. Robert Steel (MBA, Chicago, 1984), are you listening? GS, if you approach HP, with this idea, and sell some, send me a 10% "finder's fee". I earned it.