We don’t share the common view that government bond yields are heading materially higher. Indeed, very low government bond yields seem much more likely than higher yields.

Data from the National Bureau for Economic Research says that the current 90-month economic expansion from the trough of June 2009 is the third longest since they began measuring such things in 1854. But just because it has been a long cycle, does not mean it must end. And it is worth investigating what actions central banks may have to take to respond to any future downturn.

The US Federal Reserve is still raising rates, but I doubt it will be able to raise Fed funds above 2% without provoking a significant slowdown in the economy (the current rate is 0.75%). So any future easing will have very few interest rate ‘bullets’ to fire and even more ‘unconventional’ monetary easing would be likely. In this context the risk of negative US rates seems higher than the prospect of ‘normalisation’.

That is why we don’t share the common view that government bond yields are increasing significantly. The current 10-year US treasury yield is 2.4%. If the current business cycle runs for another three years it will be the longest expansion ever. The market pricing of the 10-year US treasury yield in three years’ time is around 3%. Unless business cycles have been abolished (and we don’t believe they have) the US will at some point experience an economic downturn. At this point the conventional tools available are likely to be much less than has typically been required in the past.

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