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
Managing Director
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.