Why Bond Yields Are Lower for Longer

Standard Life Investments explains what it believes is holding yields so low and for so long.

Scars from the financial crisis, fear of corporate investing and—of course—central bank policy have all been pulling on bond yields and keeping them low, according to research by Standard Life Investments (SLI).

In a study on fixed income, the firm’s Chief Economist Jeremy Lawson and Multi Asset Investment Director Sebastian Mackay set out what they believed to be the numerous cyclical and structural factors impacting these markets.

“Our research suggests that the benchmark US 10-year government bond yield will peak at 3% to 4% during the current business cycle.” —Jeremy Lawson, SLI“These are highly unusual times in the world of fixed income,” said Lawson. “The factors weighing on bond yields are numerous, complex, and in some cases, unprecedented.”

SLI’s analysis showed scarring from the crisis and prolonged private sector deleveraging had raised desired savings, weighing on domestic demand and inflation.

“Weakness in domestic demand in advanced economies has been amplified by policy mistakes and this has depressed labour markets, discouraged firms from investing, and held down inflation,” said Lawson. “Productivity growth, which had been in decline even before the crisis, has weakened further, underpinned by the drought in private and public capital spending.”

Over the past five years, 10-year US treasuries have averaged 2.3%, the study said, while the country’s GDP growth has been at an average of 3.2%.

The lack of urgency shown by the Federal Reserve to raise interest rates is likely to further impact fixed-income markets and long-term rates, the authors said.

“If recoveries in the advanced economies become more self-sustaining and if emerging market economic and financial conditions do not deteriorate further, inflation expectations could pick up,” Lawson said. “The Fed should be willing to accommodate some increase in real interest rates. Investors might also demand more compensation for holding long-term interest rate risk.”

However, the authors concluded that it was unlikely that long-term interest rates would return to their pre-crisis norms.

“Our research suggests that the benchmark US 10-year government bond yield will peak at 3% to 4% during the current business cycle,” Lawson said. “This would be above today’s levels but well below the peak of previous business cycles.”

The full report can be found on SLI’s website.

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