Is this why yields are so damn low?Aug 29, 2019
Nominal interest rates and bond yields are now low in Australia, just as they are in many other countries.
In many cases around the world bond yields have even turned negative.
In fact, bond yields have generally been trending lower for the past couple of decades…but why?
As with all market prices, bond yields are a function of supply and demand.
Now that inflation is generally lower and more stable, bonds are considered to be safe and low risk assets, and the demand from governments and institutions – often required by their charter or statute – has never been higher, in turn depressing yields.
So although there is plentiful supply, demand from pension funds, banks, insurance companies, governments, and even central banks has been stronger still.
Bond yields are also significantly affected by monetary policy since interest rates define the risk free rate of return, and in turn impact the demand for financial securities, including bonds.
So, for example, if the risk free rate falls from 2% to 1% the yield from bonds becomes relatively more attractive, and the increased demand leads to falling yields.
The forces driving low interest rates are widely debated but may include low inflation expectations, an ageing labour force and slower growth in the labour supply, and potentially lower growth prospects.
Low interest rates often represent handy news for borrowers and are positive for asset prices, but make life tough on savers and those looking for a fixed income.
You can subscribe for the Michael Yardney podcast here, where in a coming episode we discuss the above dynamics in more detail, and more specifically what it means for individuals and investors.
I discussed this topic in a little further in this short video here
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