“The bond yield average of 6.4% since 1962 is premised on the fact that the average rate of US economic growth (as measured by GDP figures) since 1962 has been 3.1% and the average rate of consumer price inflation (CPI) has been 4%,” adds Gartside.
“That stands in sharp contrast to the more recently subdued growth and inflation regime, where we have seen the post-crisis economic recovery struggle to gain sustained momentum and inflation languishing at modest levels despite the best stimulative efforts of central bank policies.”
The latest International Monetary Fund (IMF) forecasts predict US economic growth will average just 2.51% over the next five years and that inflation will average 1.65%.
For Gartside, the historical average bond yield looks unlikely to be attained in the near future, underpinned by meaningfully lower growth and inflation.
“Given historically tepid rates of growth and inflation, compounded by still elevated levels of debt, we believe the US Federal Reserve will struggle to raise interest rates to 2% in this economic cycle,” he adds, believing the Fed funds rate will in actuality reach only around 1.5%.
“With current 10-year US Treasury yields around 2%, the risk in the future is asymmetric. In other words, regardless of the fact that we remain at what are historically record-low yield levels, investors may find themselves surprised in the event of a government bond rally, rather than a sell-off.”
A run through of some of the challenges facing asset allocators in a world where bonds yields have been pushing lower for the better part of 30 years is featured here.
For now, as ever, fund selectors should be very careful about blindly trusting a consensus view on fixed income, especially given the unprecedented nature of today’s basement level interest rates.
