High debt supply threatens future costs -GAIM

LONDON (Reuters) - European nations issuing large amounts of long-dated debt to help pension funds meet rising costs of a graying population will set high burdens on future generations, a hedge fund industry veteran said on Wednesday.

The UK government, for example, issued 50-year gilts last year, responding to pension demand, but it comes at a cost, Dawn Kendall, investment director at GAIM Advisors, said.

"We are mortgaging two generations of people, not just in this country but in Europe as well. These are major problems."

"It is a drag on growth...it is not something that makes for a good economic picture," she told the Reuters Hedge Fund and Private Equity Summit.

Institutional buying of bonds has been a marked feature of the UK capital market since the 1990s when UK funding rules put pressure on retirement schemes to buy relatively secure assets like gilts, she said.

The trend of retirement funds buying bonds like UK gilts has helped push yields -- which move in the opposite direction to debt prices -- to historic lows in recent months and the pattern has been followed in other parts of Europe.

Such bond buying is also taking place in other parts of Europe. In the Netherlands, for example, new regulations have boosted funds' appetite for long-dated bond maturities.

Investment-grade bonds are typically used to calculate the value of expected pension fund liabilities under accounting rules such as the UK standard known as FRS 17.

A scarcity of available bonds has also encouraged retirement schemes to look at derivative instruments like interest rate and inflation swaps, which can mimic the kind of income streams pension funds need.

In Britain, the gilt yield curve because borrowing rates 50 years out are significantly lower than short-term yields.