The US economy has been built around low interest rates. As rates rise, so will the fallout.
You never know where the next crisis will arise but last week it came from a particularly unlikely place: defined-benefit pensions. The UK government bond market (gilts) went wild as rates spiked and pension funds failed to meet their margin calls. It created so much turmoil that the Bank of England had to step in. Does this mean that US pensions could create similar turmoil? Not to be coy about it, but yes and no. The good news is US pension funds are not so exposed to rate changes because they hold less fixed-income assets. But that is also the bad news.
Interest rates are rising and will stay high for the first time in years. This means anyone exposed to fixed income is due for some disruption. US plans hold less debt than UK pensions because they do less risk hedging, so spiking rates probably won’t cause immediate damage. But that also means they are more exposed to market risk, and as rising rates unearth all sorts of financial vulnerabilities, US plans may eventually find themselves in even worse shape than UK plans were last week.
Continue reading the entire piece here at Bloomberg Opinion
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Allison Schrager is a senior fellow at the Manhattan Institute and a contributing editor of City Journal.
This piece originally appeared in Bloomberg Opinion