Government bonds: even the most patient investors have run out of patience
Pension funds are moving away from bonds due to the “secular decline” in interest rates. This has been confirmed by analysts at the Bank for International Settlements
Patient investors around the world have long since begun to move away from the government bond sector, turning instead to funds and ETFs, as well as alternative investment vehicles (private equity, hedge funds and property). The reason? The ‘secular’ trend of falling interest rates following the 2008 financial crisis and the post-Covid period. This is the key finding of a study – published this month – entitled ‘Global pension asset allocations and debt markets’, produced by the Economic and Monetary Department of the Bank for International Settlements (BIS).
The US and Europe
BIS analysts point out that in the United States, the proportion of bonds has plummeted from around 40 per cent in the early 1980s to 10 per cent in 2023. But that is not all. Within this category, divestment has affected both private and public debt; the latter, in particular, has fallen from 11 per cent in the late 1980s to around 5 per cent of total assets in 2025.
There has also been a downward trend in the more advanced European economies, where pension funds have reduced their direct exposure to bonds from 35 per cent in the early 2000s to less than 20 per cent in recent years.
Two types of pension schemes
The BIS report also highlights another factor weighing on the move away from bonds, namely the shift from defined-benefit pension schemes (where the final pension amount is certain, whilst contributions may vary) towards defined-contribution schemes (where regular contributions are fixed but the final pension amount is variable). ‘Since defined-benefit schemes promise a fixed pension amount for life and life expectancy has increased,’ explain the BIS analysts, ‘the resources needed to honour these promises are also growing. Consequently, the longer life expectancy of the population is putting pressure on the budgets of the organisations sponsoring these schemes, making defined-benefit systems more difficult to manage.” Defined-contribution funds, such as Italy’s second-pillar schemes, are therefore much more closely linked to market dynamics. Hence, in general, the ‘hunt for yield’ highlighted by the study: yet another factor adding to the context of the long-term decline in interest rates.
It is also pointed out that both types of pension funds are shifting towards funds and ETFs, although defined-contribution schemes already had a significantly higher proportion of these types of instruments to begin with.
