How low can bond yields go?
The yields on fixed interest securities have fallen to all-time lows recently, as investors seek safety for their money. But just how low can they go?
Ian Spreadbury, a fixed interest manager from Fidelity, has commented on this question, predicting that the resting place for yields in the US and UK will be somewhere between previous “norms” and the more extreme Japanese experience.
He discusses the extreme example of the Japanese economy, which is structurally very different from the US and UK. They have had cash rates under 1% for almost 15 years and their 10 year government bonds have hovered between 1% and 2% for most of this time.
Spreadbury goes on to predict that 3% could become the new norm for UK Gilt yields, after they have been anchored at around 5% for much of this decade.
As with all investment predictions at the moment, uncertainty about inflation in the future puts a potential spanner in the works.
He points out that moves by monetary policy makers, such as quantitative easing, could result in inflation which would pose a risk to this asset class. He concludes that the chance of a policy mistake over the long run are significant and this would not be good news for government bonds.