Bond yields to rise amid global shift in consumption

GLOBAL - Global longevity will drive up bond yields over the next two decades as shifting global consumption trends increase political risk, according to Paul Robinson, head of foreign exchange at Barclays Capital.

Mass baby-boomer retirement will reverse the downward trend in interest rates - and with it a 20-year decline in bond yields, he told a London conference.

"As ageing populations start to retire, interest rates will rise and China's deflationary role in the global economy will end. Be prepared for it."

Describing the rise of emerging markets as "the most important trend in 20 years", he pointed out that China had until now exerted deflationary pressures by reducing the relative price of manufactured goods, while goods-intensive consumer price inflation improved the terms of trade for western countries. In contrast, from now on, China's pressure will be inflationary. 

"For a few years it was an ideal world," said Robinson, a former Bank of England economist. "But it led to bubbles and over-confidence among policy-makers who believed they had learned how to control inflation."

Longevity, often identified as a problem for the west, is equally a problem for China, he pointed out. One response to what is effectively a global problem will be for governments across the world to increase the retirement age.

"It's unlikely, globally, that people will live longer without working more," he noted.

Over the next decade, saving in the US and UK will increase "come what may", but the global composition of consumption will change significantly. The natural response to an ageing population in the west has been to try to increase savings. Yet higher savings and lower consumption rates could potentially lower aggregate demand around the world.

Either way, the US will lose its dominance as the chief consuming economy to China and - more importantly - to India, driving a significant increase in political risk.

"Democracies in the western sense have driven the global economy," he said. "That won't be the case in the decades to come."