The structural slowdown in global economic growth and dramatic drop in bond yields represent a paradigm shift that is forcing a rethink of portfolio allocations. Ageing societies and weak productivity growth have led to a persistent decline in economic growth. What is now considered a neutral policy rate for a central bank – one that neither stimulates nor restrains growth – has experienced a likely medium-term decline in the United States and other major economies.
This low neutral rate and large central bank ownership of government bonds are why we see long-term bond yields staying low on a five- to 10-year horizon. Investors should not expect bond yields to revert to historical averages, notwithstanding likely short-term swings. Low risk-free rates – the fundamental basis for gauging asset valuations – represent an underappreciated sea change in assessing future returns, in our view. Asset valuations need to be seen through a different lens.
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