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Global yields will be moving lower contrary to nearly every single pundit who has called for them to go higher since the 2008 Great Recession. What's truly amazing about today's yields, is that historically, say over the last 200 years, they are at or near historic lows. What's more, is that this seems to be the new normal. Just this past week, Ben Bernanke has indicated in comments to a group of investors that rates will be staying low for a considerable amount of time longer as economic conditions don't warrant tightening. The ECB has also hinted the same. With Japan's 10yr Bond now below 1.0% and pushing within 20 basis points of its 144 year history low, I would have to imagine we are heading very much in the same direction.
What is driving yields lower is up for debate as there really is no clear consensus on why. Coming out of the recession of 2008, my knee jerk reaction was that rates had to rise as things gradually returned to a historic norm. What I mean by historical norm is 6.2%. That being said, the US 10yr Bond in its nearly 250 year existence has an average yield of 6.24% over that time span -- hence my knee jerk reaction that things can and should move back close to its historical average after dropping to historic lows. Today, I really believe we are establishing a new normal. Not to sound so cliché, but things truly are very much different, and I am almost certain that we will follow in Japan's path to yields closer to 1%.
The new normal is predicated on several driving factors. The first being the world's Central Bankers. Can you name one global Central Bank that has started easing and then has stopped it? Quantitative easing is here to stay and will not be tapered as many believe. Again, just look at Japan and the decades of easing relative to their current yields. Second, persistent and stubborn slow growth. Recently, I did research that demonstrated that consensus estimates on GDP have been wrong for 21 straight quarters. Growth is slow to recover and we have very low inflation as a result. Lastly, I sincerely believe that risk is being taken out of Government Bonds. Look at Spain and Italy since the global depression. Once there was fear that they may default on their debt and their respective yields spiked. Today they are back in line with their peers with little change to the underlying fundamentals. With the EU rallying around Greece to prevent its bankruptcy, I have to believe that if we would bail out the global banks, we would also bail out countries whose debt has become too much to handle. Too big to fail would now apply to countries in every nook and cranny around the globe.
When you begin to factor in all of the geopolitical risk, you have a recipe for years of political and governmental intervention that results in constant financial engineering. With this, yields will go quite a bit lower from where we are today. To support this, I have put together a historical 10yr Bond chart that shows over 200 years of history in addition to the same chart from 1950. The historic chart will show the significance of where rates are today relative to where we have been, while the shorter duration chart will show the global downturn of late in a bit more detail.
And from 1950:
Ralph M. Dillon is Vice President of Institutional Sales at Global Financial Data. GFD specializes in providing Financial and Economical Data that extends from the 1200s to present.