Good morning!

It's very quiet for results today. I'm travelling back to Hove later this morning, so once back home will try to catch up on a few companies that I missed yesterday.


Bond yields

I don't follow bond markets in particular, because it strikes me that risk:reward on bonds could hardly be worse. You get no inflation protection (apart from index-linked gilts) on most bonds, yet the yield is derisory in most cases. So the risk is all to the downside (as the value of a bond will fall when inflation & interest rates rise), in return for a pathetic reward (yields are extremely low). Who in their right mind would want to buy that sort of asset? Pension funds seem to think they are matching their assets and liabilities by buying bonds, but what happens if there's a surge in inflation? Then a gap would open up. UK inflation is likely to rise to 3-5% in 2017, due to imports costing more after sterling's devaluation.

My Twitter feed is filling up with comments and articles about bond yields rising. It strikes me that this could be good news for UK companies which have significant pension deficits. These deficits have swollen in recent years due to very low bond yields - because the liabilities are measured with reference to bond yields. Liabilities increase when bond yields reduce, and vice versa.

So it occurs to me that pension deficits may benefit from rising bond yields. Mind you, presumably there would be an offsetting effect from higher inflation - meaning that the annual inflationary rise for pension payments would increase the liability. I'm not sure how the 2 factors would combine. Do we have any actuaries in the house, who could comment on the situation?

I hold over 40 positions in my family portfolios, and from memory can only think of one position that has a significant pension deficit (relative to market cap), which is Norcros (LON:NXR) (in which I hold a long position). I'm considering topping up there, as the valuation looks remarkably low - it's not often where you see the PER the same as the divi yield (both 5.2 in this case). Sure its pension fund is huge, but the overpayments are modest. So instead of seeing a huge liability, I see a manageable cash outflow for maybe the next 20-30 years. It hasn't prevented the company…

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