Analysis: Pension funds may see the silver lining on the interest rate cloud

Wed Jun 26, 2013 1:56am EDT
 
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By Mike Dolan

LONDON (Reuters) - June's global markets quake suggests little positive in a rising interest rate environment but the flip side is significant relief for pension funds that may itself may provide a stabilizing mechanism into the bargain.

Bonds, equities and emerging markets have all lunged violently since the U.S. Federal Reserve last month started signaling a timeline for a reduction in its latest bond-buying program, in what some see as the beginning of the end of its four-year-old policy of quantitative easing.

Hyper-sensitive to a big turning point in the U.S. monetary policy cycle, benchmark 10-year Treasury yields have jumped up to a full percentage point - to more than 2.5 percent - since the first week in May - pushing up long-term interest rates across the globe and puncturing buoyant world equity.

This, of course, could be an overreaction by short-term markets. With little change of economic information and only minor tweaks to policy guidance, they have lurched within weeks from the euphoria of endlessly cheap money to conjuring up the gloom of ever-spiraling interest rates.

Policymakers themselves seem to think so. Bank of England Governor Mervyn King said on Tuesday investors had "jumped the gun". Dallas Fed chief Richard Fisher was blunter on Monday in referring to markets as "feral hogs" and "manic-depressive mechanisms."

But on a more measured view there is a positive side to at least normalizing interest rate levels, if not higher borrowing costs per se.

The most obvious is the one highlighted by Fed chief Ben Bernanke himself. "If interest rates go up for the right reasons — that is, both optimism about the economy and an accurate assessment of monetary policy — that's a good thing."

And if the monetary policy pullback is indeed commensurate with economic recovery, then equities could well resume their rise alongside higher interest rates and have done historically.   Continued...

 
A trader looks up at a screen on the floor at the New York Stock Exchange, June 25, 2013. REUTERS/Brendan McDermid