Rates of Interest on Treasuries, on Average, as of September 30th, 2022

Reusing a figure from one of my earlier posts, for the sake of simplification in the following calculations, let's suppose that the weighted average coupon rate on government bonds is 2%. (because it is according to the Treasury). With an income rate of 2% on one-third of your money, this indicates that pension funds need to generate yearly returns of 9.5% or higher on the remaining two-thirds of their money, each and every year, without fail, or else they face the danger of not being able to cover their pension payments. There is no wiggle space for mistakes.

So, what do you do when you begin to feel the strain, yet you are required to continue buying bonds despite the fact that you do not have enough income? You then begin to leverage your positions, a strategy that, only a few short weeks ago, came dangerously close to causing an explosion in the pension market in the UK.

Because of the prevalence of quantitative easing and low interest rates, pensions were forced to leverage their positions in order to increase yields and cash flows. This was necessary because the Washington Post has a pretty good round up of the situation. In essence, however, pensions were forced to do this.

If I were to channel my spirit animal, Greg Foss, I would say that increasing the leverage on a position by three times can improve the yield from two percent to six percent, but leverage can work against you as well. A loss of 50% results in a loss of 150% and begins to eat into the value of your other positions and investments. This is precisely what had place in the United Kingdom, which resulted in the need for a bailout to prevent the liquidation of pension funds and prevent systemic damage on the banking and lending system.

Enter bitcoin, stage left. I believe that pension funds will be pushed to consider alternative assets such as bitcoin in order to help build their fiat-denominated asset base and service its obligations to pensioners. This will prevent pension funds from having to leverage holdings in order to enhance yield.

Recent work includes an article I penned on the topic of the debt spiral idea. Although central banks are currently rising interest rates, this trend cannot be maintained indefinitely. As a result, pension funds will ultimately be placed back in the low-yield environment that was the original source of the systemic issues.

There is no possibility of Bitcoin ever being liquidated. Bitcoin does not require leverage. Pension funds may utilize bitcoin as an asymmetric opportunity to boost their returns rather of placing hazardous wagers, which would only serve to perpetuate a culture of moral hazard and socialize the costs of any losses that occur.

I believe that this will eventually occur because an increasing number of asset managers are coming to the conclusion that it is their responsibility to fulfill their promises to pensioners. As soon as one person establishes a precedent, the subsequent dominoes will fall. Try not to come in last.