Deloitte LLP chief economist Ian Stewart has commented on the extraordinary low level of interest rates on the bonds of the major industrialised nations.

Stewart said that interest rates on 10-year bonds issued by the UK government are at the lowest level since 1703 and this year has seen negative yields on two year Swiss and German bonds. On the other hand, Greece is paying ten times as much to borrow as Germany.

Stewart said four factors are currently at work. Firstly, demand for safe assets has risen, with investors willing to pay a premium to insure against capital losses. In turn, this trend has been supported by declining growth expectations in the industrialised world which have reduced demand for risky assets such as equities. Stewart added that the financial crisis has created new demand for government bonds, as governments have started quantitative easing, buying government bonds on a huge scale. In addition, financial regulation has led banks to hold more government bonds.

Is there an unsustainable bubble in government bonds? Stewart said bond prices have risen at a remarkable rate in recent years. He concluded: “Whether an asset price boom is sustainable depends on whether the fundamentals of the economy have changed. If we are in a new normal world of elevated risk, weak growth and low inflation, current ultra low bond yields may be here to stay. If not, bonds are heading for a fall”.


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Published: October 15, 2012
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