Aging populations are reshaping the world’s largest economies; it’s caused a global savings glut and is driving current U.S. financial economic conditions. The demographic trends are behind the U.S. yield curve inversion and stock market volatility, but rarely make headlines in the financial press. Here are the facts.

Germany’s working age population is shrinking, as is all of Europe’s, Japan’s and China’s, too. In contrast, the U.S. working age population is expected to grow in the years ahead.

With the world’s largest economies home to a growing population of retirees, demand for secure retirement income is driving prices for sovereign bonds higher. The glut of savings from income-starved retirees is chasing the certainty of government guaranteed bonds, driving prices higher and yields down.

Exacerbating the bond market problem, Germany, the world’s second largest supplier of sovereign bonds after the U.S., has been issuing fewer bonds to avoid burdening its growing population of retirees with paying down government debt. Shrinking the supply adds to the upward pressure on sovereign debt prices and depresses yields. In addition, rising likelihood of a recession in Germany, has forced its central bank to keep interest rates low to stimulate growth.

This confluence of the demographic and economic slowdown has boosted demand for U.S. Treasury bonds, driving prices on long-term bonds higher and yields lower. With the yield on a three-month T-bill at 1.99% higher than the yield on a 10-year Treasury bond, at 1.5%, the yield curve is inverted — as it has been for much of 2019. For the past several decades, yield curve inversions were rare and usually were followed within 18 months by a recession. So the current inversion has spread fears of a U.S. recession and caused increased volatility in the stock market in recent months.

Retirement income investors may want to consider how lower yields on fixed income allocations in their portfolios might affect them in the years ahead, because the change in supply and demand for sovereign debt is being driven by long term demographics. Significantly, the yield curve inversion is caused by bond market supply and demand and not U.S. economic fundamentals. The baby-boom spawned an “echo” baby-boom generation and that makes the growth path of the U.S. comparatively favorable to the other major world economies.

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