GLOBAL MACRO OUTLOOK

The safety premium driving low rates

Nov 10, 2017

A critical factor is often overlooked in explaining low interest rates: a structural rise in risk aversion and savings over the past two decades. The resulting demand for highly liquid assets deemed safe is likely to keep rates historically low.

Highlights

  • Interest rates are not determined by potential growth alone. We believe a step-up in risk aversion has led to a structural rise in precautionary savings, further dragging down bond yields across the curve – a trend that won’t quickly change.
  • Risk aversion also pushes investors towards the relative safety and liquidity of G3 sovereign bonds, squeezing term premia. This might seem inconsistent with record-high equity indices – except that investors are putting an even higher historical premium on core bonds. Quantitative easing (QE) has not been the main driver but makes such assets even more scarce.
  • The gravitational centre for interest rates – neutral rates (r*) – is more global in nature thanks to tighter financial integration, another shift unlikely to change. G7 interest rates are now more influenced by global factors.
  • Perceptions matter. Changes in perceived risk can jolt markets out of the current high risk aversion regime and lift rates. Yet we think this is unlikely. Record-high world debt stocks make various economic actors more vulnerable, motivating greater savings as a buffer against future shocks.

Gauging the glut
G3 term premium, global savings inverted, 1995-2017

Chart: Gauging the glut
Jean Boivin
Head of Economic and Markets Research, BlackRock Investment Institute
Jean Boivin, PhD, Managing Director is Head of Economic and Markets Research at the Blackrock Investment Institute, a global platform which leverages ...
Chief Investment Officer, BlackRock Systematic Fixed Income
Tom Parker, CFA, Managing Director, is Chief Investment Officer of Model-Based Fixed Income ("MBFI") at BlackRock.