- Falling bond yields is already a three decade long process. Almost all of it has come from declining real (after inflation) yields than from any significant change in inflation or inflation expectations.
- Our Economics 101 summary sees this long-term trend reflecting secular forces. These mostly centre on the forces pushing savings rates higher while investment rates have stalled. The recent cyclical slowdown is also contributing to lower interest rates and bond yields in 2019.
- It will not take much for negative rates and yields to become fully global. Expected interest rates over the next decade are already at very low levels in the US (and other positive yielding markets – UK, Canada, et.al). All it needs is for the long-term trend seen to continue for a little longer.
- Nor can it be argued that negative rates are unsustainable. They already have been sustained for most of the past five years in Europe and Japan. Though they do impose distortions, there is nothing intrinsically unsustainable about negative rates and yields.
- Challenges to this trend towards zero and negative rates and yields could come either from a strong pick up in the global economy, or from a major shift in economic policy, probably taking the form of a large coordinated fiscal and monetary expansion. The second has greater power in moving the yield and rate dial much higher, and for longer, but we cannot be sure such a seachange in economic policy will come. A deep and prolonged recession will increase that possibility as policymakers will have little alternative choice to stimulate economies.
- All told, negative rates and yields ‘going global’ remain a live possibility that we should keep on the radar. Its implications for our clients are many and will need exploring.
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Appendix, Legal Disclosures and Disclaimers
Bloomberg Barclays Global Aggregate Index - An unmanaged index considered representative of investment grade fixed-income obligations issued by global governments, global corporate, specified foreign debentures, and secured notes.
ICE BofAML MOVE Index – An unmanaged yield curve weighted index of the normalized implied volatility on 1-month Treasury options.
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