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I founded and co-founded a couple of companies: Redington and mallowstreet; I write about issues of the day that touch me and make me think. Mostly about how to make things better.

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Sir Thomas and the Falling Real Yield

As we gaze in sickening awe and wonder at the real yield turning negative  (see the graph below) and taking pension fund promises under the waves with it, here is another of my Market Diary blogs from July 2005.

(Btw, this graph is undoubtedly the most terrifying thing you have laid eyes on in recent times)

The Descent of the Real Yield (on the 2035 Index Linked Gilt)

Po-tay-to,   n.                                                                     28 July 2005

On this day, 1586, the great explorer and quintessential renaissance scholar, Sir Thomas Harriot, returned to Britain from Columbia bringing with him a sackful of batatas edulis*.

Contemporaneous accounts reliably inform us that the initial reaction of the local populace was, to say the least, mixed.

Some questioned the sense in hauling batatas all the way from South America and said they frankly couldn’t see why they would ever need them.

Others said that although they had never tried them, they could just tell that batatas were harmful to the constitution. Not having used them in the past, they wouldn’t be using them in the future. Going further, the French took the view that batatas caused leprosy.

Still others decided to get to take a closer look, but remained undecided on how to use a batata.

One of the great commentators** of the day summed it up –

People are smoking them, building houses with them… They’ll be eating them next.

At some point, Sir Thomas’s market tipped. Four hundred and nineteen years later, we consume 15,000 tonnes of batatas a week.

Maybe all this is analogous to the pensions industry’s use of swaps as effective instruments to hedge against the risk of a falling real yield. Some schemes are already using them (see Market Diary 26 July), others are waiting to see if the early movers keel over into their fries.

Some day, I suspect, swaps will be commonplace instruments used globally by pension funds – in the same way as insurance companies, banks, mortgage lenders and corporations. As pensions regulators, accounting standards boards and credit rating agencies start to get involved, it won’t take four centuries.


*common potato 
**Black Adder II

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