This article will be too dry and boring to appeal to most readers, but those who are boring and dry like me may like it. There are two key takeaways: One, that interest rates and bond prices now operate in anything but a “free market”…..and two, this should cause nominal interest rates to stay artificially low and real interest rates (those measured after the effects of inflation) to remain negative for some time. As a result people need to save a lot more money to fund their retirement lifestyle (…and that’s no fun.)
Excerpt from the article:
First, it’s clear that central banks will be huge players in the asset markets for the foreseeable future. The Fed is buying mortgage bonds, not Treasuries, this time but both the ECB and the Bank of England are still in the bond-buying business. All suggest that in the long run they will unwind these purchases, either by selling the bonds or by not buying them when they mature (the effect is the same; the private sector will have to pick up the slack). But clearly we are nowhere near the point at which these programs can be reversed and unless the economy does become a lot stronger, it is hard to see how they can be.
So when we talk about the “market reaction” to economic news, we need to be clear that bond prices are not set in a free market; they are set, in large part, by a huge non-profit maximizing public sector buyer.
Second, nominal interest rates are going to be at historic lows for the foreseeable future as well; the Fed extended its outlook from 2014 to 2015. If you are a cautious saver, you will get a low nominal (and probably a negative real) return. If you are a retiree forced to buy an annuity or a pension fund hedging its liability with government bonds, you will need a much bigger pool of savings to meet your chosen retirement income target.