Tim Worstall

Economic Idiot Award VII

Larry Elliot at The Guardian gets a share of our latest, famous, award.

By law, pension funds must keep much of their portfolio in gilts but
falling yields cut the value of their holdings and leave them with even
bigger potential deficits.

Beg pardon? Gilts are bonds. A fall in yields means the value of the holding goes up.

The price of 50-year gilts (which moves inversely to the yield) has risen 17% in the past month and 10% just in the last week.

Ah, they get it right later. So, a worthy winner I think. Falling yields both cut and increase the value of the holdings, all within 800 words.

Lashings of ginger beer all round.

In

2 responses

  1. Matthew Avatar
    Matthew

    It’s also wrong about the gold price. It was in fact the sell-off on Tokyo that saw gold record a $14/oz one day loss, not propel it to its high.

    Reply
  2. Umbongo Avatar
    Umbongo

    The problem is – as explained on the front page of the FT – is that the liabilities of pension funds are also valued on the basis of bond yields. So as yields on gilts go down, liabilities go up and pension funds are forced into the market to buy gilts which, because of the demand, go up in price. There is, of course, a compensating increase in the gilt part of pension fund assets but pension funds rarely hold all their assets in gilts/bonds.

    Reply

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