Interest rates rise: stocks under pressure, good news for pensions

Interest rates on the European capital market are rising. Ten-year government bond yields have passed the zero limit, ending a long period of extremely low and almost continuous negative yields. Interest rates are also rising in the United States.

The cause of the rate hike is investor concerns about high inflation and central banks’ plans to end pandemic support and raise interest rates. Higher bond yields are good news for pension funds and are expected to feed through to higher mortgage rates as well.

Rising interest rates are further putting pressure on the stock markets, resulting in falling stock prices and falling bond prices.

Dirt Cheap Debt

For the state, the dirt-cheap financing of government debt is gradually coming to an end, and the state even received money at the negative interest rate. In recent years, the Netherlands has considerably extended the maturities of the government debt.

At the end of 2012, the average maturity of government debt was 3.5 years; last year it had already risen to almost 7 years, and 8 years was approaching.

The Dutch 10-year yield has occasionally risen above zero in recent weeks, but today’s 0.117 percent is the highest since May 2019. The German interest rate is above zero for the first time in almost three years, at 0.004 percent. And the US 10-year yield is steadily climbing towards two percent, its highest in two years.

The interest rate hikes still look very small, but in light of the past period of ultra-low interest rates, they are almost seven miles away.

Coverage

Pension funds are strongly dependent on the market interest rate for their pension benefits. When interest rates are low, the funds need more money to meet future pension obligations. As a result, they cannot index and sometimes even threatened to reduce pension benefits.

With regard to pension funds, the rule of thumb is that every increase in interest rates by 1 percentage point leads to an increase in the current funding ratio by 13 percentage points. A tenth percentage point rise in interest rates is good for more than one percentage point higher funding ratio.

Mortgage

Mortgage rates are already showing a tendency to rise. According to Van Bruggen Adviesgroep, almost all lenders have increased the interest rate on many mortgages, from five to thirty years, by an average of 7 to 8 hundredths in recent days. The prospect of higher mortgage rates could trigger a wave of refinancing, as well as put pressure on house prices.

It is also expected that lenders will refrain from raising mortgage interest rates. Competition between mortgage lenders is fierce and interest rate margins are narrow.