“These are highly unusual times in the world of fixed income,” Lawson said. “The factors weighing on bond yields are numerous, complex and in some cases, unprecedented.
Lawson has authored a paper on the matter which delves into the detail of how and why the bond market looks like it does at the moment.
“Our analysis has uncovered a number of important economic and policy drivers of this low US and global interest rate environment,” he said. “Aftershocks of the financial crisis are still being felt, seven years after Lehman Brothers collapsed. Our analysis shows that the scarring from the crisis and prolonged private sector deleveraging has raised desired savings, weighing on domestic demand and inflation. Weakness in domestic demand in advanced economies has been amplified by policy mistakes and this has depressed labour markets, discouraged firms from investing, and held down inflation. Productivity growth, which had been in decline even before the crisis, has weakened further, underpinned by the drought in private and public capital spending,” he added.
Lawson said that by both ‘accident and design’ central banks and regulators have been pursuing policies that lower real interest rates, which has enhanced the demand for all income yielding assets.
Central banks have been forced to keep short term interest rates at or even below zero and employ unconventional policy to suppress real interest rates along the entire yield curve.
Having examined the potential triggers for long-term bond yields to shift in the US Lawson and his colleagues conclude that it is unlikely long term interest rates will return to their pre-crisis norms. “Our research suggests that the benchmark US 10 year government bond yield will peak at 3 to 4% during the current business cycle. This would be above today’s levels but well below the peak of previous business cycles,” Lawson said.
The full paper can be read here
