Tuesday, August 21, 2012
Life in the negative real yield environment
The key issue I cover in my latest economics & fixed income strategy publiction is the trend towards negative real yields on an increasing range of assets. In the period of 1982-2009, the great bond bull market in the US was driven largely by lower inflation. Since 2010, however, the bond bull market has been almost exlusively driven by lower real yields.
Also in the Eurozone, the ECB is orchestrating a negative real yield environment for an increasing number of assets (first on Bunds, then the semi-core markets and now the periphery and with that essentially on all carry products). Negative real yields not only provide an easy monetary environment but they also help to lower debt-GDP ratios over time. Contrary to popular opinion, high inflation rates are not a necessary condition to lower debt-GDP ratios. As long as deflation is averted ultra-low nominal bond yields provide for the necessary low/negative real yields. For the deleveraging economies with increasing sovereign debt, this provides the easiest way out of the financial and economic crisis in an environment where nominal GDP can only grow at low rates (amid low trend growth and amid low inflation rates in a deleveraging economy).
This trend is far from over and negative real yields in the deleveraging economies will be with us for the rest of this decade.
The presentation can be found here: "Life in a negative real yield environment".