Lower for Longer

Today's low interest environment can't persist, can it?

Lower for Longer

The short answer is, “yes it can.” Just consider the situation.

Over the past two decades we have seen an extraordinary decline in interest rates in all the major advanced economies. Since the financial crisis quantitative easing by central banks has brought bond yields to historical lows: yields on 10-year government bonds in Switzerland, Japan and Germany are even negative. With Brexit, there is more pressure on rates as central banks have indicated they are ready to ease monetary policy further.

As quantitative easing programs have expanded, we have seen the reduction of bond yields across the entire term structure and credit curve. Today less than a third of bonds, measured by market value share, return more than three percent per annum. In the second quarter of 2016, ten percent of all bonds had a negative yield.

Over the past decade, bond yields have been dropping steadily. As of the second quarter of 2016 bonds with a maturity of 20+ years yielded 2.15%, while those between 0 and 3 years yielded 0.5%. This difference may suggest that markets do not expect to see a material increase in nominal rates any time soon.

So yes, there is a likelihood that the current situation will persist. That means that what some are calling the “lower for longer” scenario is more likely to become the new normal.