While low yields can be beneficial for investors and borrowers alike, there’s a limit to how low they can go before becoming unsustainable.
The current rate on 10-year government bonds is an all-time low of 1.32%, down from around 3.48% in December 2008. This has benefited both investors and borrowers through lowered interest costs on investments and mortgages. However, yields cannot remain at these levels indefinitely. A yield below 1% is considered a “negative yield”, meaning investors would be losing money in real terms if they held the investment long enough. Even if yields don’t fall into negative territory, they are unlikely to stay this low for much longer.
The main reason for this is the fact that low yields make it difficult for banks and other lenders to make money on their loans. When borrowing costs are very low, lenders have little incentive to lend money since they won’t make a return on their investment. This creates a lack of liquidity in the market, which can lead to higher economic risk. Additionally, with such low yields, investors will begin to shift their money away from fixed-income investments in search of higher returns, resulting in further downward pressure on yields.
In order to combat this dilemma, central banks around the world have engaged in a policy of quantitative easing. Quantitative easing involves the central bank buying large amounts of government bonds in order to inject money into the economy. This results in an increase in the money supply, which in turn increases the demand for investments, thus pushing yields up. This policy has been used in countries such as the United States and Japan, as well as other developed nations.
In conclusion, yields have been on a steady decline since 2008 and this has been beneficial for investors and borrowers alike. However, these low yields cannot last forever and have the potential to create an economic crisis if they dip too low. Central banks have therefore resorted to quantitative easing in order to maintain yield levels at a sustainable level. While this policy has so far proven successful in raising yields, it is uncertain how long it can be sustained. Regardless, it is important to remember that low yields come with risks and should be monitored closely.
This article was contributed on Jul 02, 2023