Fed up with low bond yields, the most conservative investors on the planet have begun to load up on stocks. Retirees? No, I’m talking about the world’s central bankers.
Nearly 1 in 4 central bankers say their institution owns stocks or plans to own stocks in the near future, according to a Bloomberg report. The Bank of Japan plans to more than double its stock position, according the report, which cites a Central Banking Publications and Royal Bank of Scotland survey. The Bank of Israel bought stocks for the first time last year. And both the Swiss National Bank and Czech National Bank have boosted stock ownership to at least 10% of reserves.
This move into stocks is highly unusual. Central bankers are famously risk-averse. Previous surveys in this series didn’t even ask about stocks. Central banks tend to hold reserves in government bonds, which are easy to buy and sell. (They use reserves to manage their national currencies.) But with yields having fallen below the rate of inflation, holding bonds devalues their reserves. So they have begun diversifying into other assets, chasing higher returns.
This is not unlike the dilemma facing many retirees and other individual investors: holding ultra-safe interest-bearing investments is wise past a certain age; yet when yields are lower than the inflation rate, this strategy erodes buying power and undermines long-term financial security. For this reason, many retirees have been seeking higher yields with dividend-paying stocks and even moving into high-yield, high-risk corporate bonds.
Central banks, of course, have a much bigger margin for error than your typical retiree. Their time horizon is eternity and they can print more money if they must, though the consequences of doing so are best avoided. Still, central banks moving into stocks offers some comfort to retirees pushed in the same direction. Everyone must adjust to this new normal.
The U.S. Federal Reserve does not appear to have joined in the stock-buying trend. The Fed is not permitted to make direct stock purchases. But there is nothing to prevent it from funding a Special Purpose Vehicle that buys a broad basket of stocks through indexes or Exchange Traded Funds. In the past year, Wall Streeters have speculated the Fed would buy stocks as part of its quantitative-easing programs to stimulate the economy. The investment website Seeking Alpha had this to say:
“There is a case for the Fed to start buying stocks. By raising the value of stock portfolios, a rising stock market impacts consumers through the well-documented wealth effect. By raising P/E ratios, it lowers the cost of capital … Rather than inflating a bond bubble, our view is that the Fed needs to impact the assets that are directly relevant to is objective, namely stocks.”
With the economy showing some spark — first-quarter GDP was up 2.5% — it’s less likely the Fed will make such a move now. But the Fed, which directly controls short-term interest rates, is clearly pushing others down the road to stock ownership. It has all but declared its intention to hold rates unnaturally low until investors rediscover their appetite for risk. This has led some to predict a great rotation out of bonds and into stocks.
The evidence of such a movement is mounting. U.S. stock funds had inflows of $21.5 billion in the first quarter, the best quarterly showing since 2004. This has helped push the stock market up 10%.
One line of thinking is that the rally is about over now that stock funds are seeing such brisk investment. Yet as long as rates remain low, nontraditional stock investors like retirees — and, yes, central bankers — will keep piling in. Things could get dicey when rates rise substantially. But that does not appear to be imminent.