The ‘new normal’


While it looks as though the 36-year bull market in global bonds may have run its course, there is little evidence to suggest that yields will return to previous high levels. Bond yields will rise over the medium-term, but will arrive at a more ‘benign’ level for a variety of reasons, reflecting several ‘enduring’ factors that drove the long-term bull market in the first place (Oxford Economics, 2016). Foremost among these is demographic aging


and the ‘savings glut’ as detailed above. According to academic studies, this factor alone may be responsible for around 125 bps of yield compression. Aging has meant falling economic growth potential as well as increased savings. Likewise, US data suggests that QE is responsible for another 100 bps of compression. A variety of other factors have also depressed bond yields, as detailed in the table below.


Factors


Demographic aging


Quantitative easing


Slow productivity growth


Rising debt margins


Shortage of ‘safe’ assets


Capital goods price falls


Income inequality


Fall in public investment


Description


Reduced labour pool lowering economic growth po- tential. Increased savings (‘savings glut’) & demand for interest


Impact primarily on long-term bond rates Undermining economic growth potential


Base rates compensate for increased borrowing costs


Lack of ‘safe haven’ assets globally Impact of globalisation and free trade Wealthy have higher savings rate Constrained budgets limit fiscal economic stimulus


¹These numbers are indicative only, interpreted from OE’s compilation of values from numerous studies. Source: Oxford Economics, Research Briefing 28 October 2016.


¹Long term effect on rates 100 bps


100 bps 80 bps 70 bps 50 bps 50 bps 45 bps 20 bps


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