Low bond yields: Get used to it - CIBC

Analysts at CIBC, consider that low real neutral interest rates are here to stay, driven by factors like lower inflation expectations and more recently by concerns about global growth. 

Key Quotes: 

“The rally has seen German 10-year rates dive into negative territory. US 10-year Treasuries sit at their lowest yield since September 2017, despite the fed funds rate being up 125 basis points since then. In Canada, 10-years are at only 1.55%. All of that despite the fact that, in both the US and Canada, unemployment rates hover at multi-decade lows.”

“In essence, there are three elements to the story. The first, a fall in expected inflation, is generally benign about what it says about the future. The second, a declining neutral rate of interest, is a bit more concerning. The third, tumbling confidence about global growth, is the one to worry about.”

“The most worrisome driver of the latest leg of the bond market rally owes to a flight to safely from assets dependent on global growth. Investors are taking money off the table from after what has been a long bull market in equities, and parking money in what had been earlier judged to be unattractively low fixed income yields.”

“When it comes to low bond yields in this cycle, get used to it. Low real neutral rates are here to stay, inflation isn’t due to surge ahead, and there’s a US slowing coming in 2020 as fiscal stimulus fades out. But there are reasons to believe that today’s rally will at least partially reverse in the next couple of quarters if trade tensions cool, US core inflation edges up, and most importantly, we takes steps towards avoiding a protracted all-out trade war.”