Higher yields

European bond yields are on the rise, with a similar diagnostic than the U.S., rampant deficits and high debt to GDP ratios. They are approaching 5%, which seems to be the converging number for most developed nations (except Japan), and the bogie everybody is watching. It does look like surpassing 5% will trigger some response from investors and central bankers. In addition to that, the Dutch pension system, one of the biggest ones in Europe, is changing from a defined benefit model, to a defined contribution one, and that implies, in essence, there will be no future liability matching, or simply put, there will be no need for long term bonds. The burden of the pension payments will be transferred from the government to the pensioner, which will no longer have a defined amount upon retirement. That means there will be less support in European bond auctions, particularly the long maturity ones. The world is running out of structural long term buyers of long dated bonds, at a time where governments need to issue long term debt to finance their deficits at the lowest possible rate in anticipation of much higher yields.

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