Pension Demand Inverts The UK Yield Curve

The U.K. government may well find itself paying less to borrow over 50 years than it does to borrow over six months when it sells 2.25 billion pounds ($3.9 billion) of bonds in an auction this week: The main culprit: demand from the pension funds. The yield on the UK government's 4.25 percent bond due in December 2055 was at 4.06 percent in London this morning. This compares with 4.48 percent available on six-month bills. Actually 4.06% fifty years out from now looks a little expensive to me, but then, I guess - or at least I hope for the pensioners-to-be - that these guys are hedged. Anyway, rather than talking about impending recessions, shouldn't we be getting back to all that talk about a global savings glut?

Longer-term bonds have yielded less than shorter term securities for most of the past two years. The yield on Britain's 2055 bond is less than the 4.16 percent on 30-year gilts which are below the ten-year's 4.26 percent. Bonds maturing in 50 years have yielded less than six-month Treasury bills since they were first sold on May 26.

Investors often interpret this so-called inverted yield curve as a sign of an impending recession. In the U.S., the past four recessions came after 10-year notes yielded less than two- year Treasuries.

The situation is different in the U.K. because of demand from pension funds.

``Bonds between 30 and 50 years are in a sweet spot,'' Robert Stheeman, chief executive of the agency that manages the U.K.'s debt sales, said in a Dec. 1 interview. ``Our core investor base is the U.K. pension industry.''