Fall in rates may be due to pension funds says UK central bank

The Bank of England believes that the decline in long-term real interest rates may be down to the behavior of pension funds.

The central bank said in its quarterly inflation report that a strategy of holding long-dated government bonds may have helped push down long-term yields. Pension funds’ demand for long-dated bonds has been further boosted by the need to purchase assets in order to reduce large deficits, the bank said.

The recent decline in long-term interest rates will put further pressure on the deficits, because pension fund liabilities are calculated using current market interest rates to discount future obligations.

The bank added that if investors use the current low level of long rates to value the flow of returns that they expect to receive from other assets, then an unwinding of recent falls in long rates could trigger a broadly based decline in asset prices. But if long rates remain at their current low levels, that could support asset prices, and ultimately demand.