Lower for even longer? How to achieve income and growth in an age of suppressed yields
Monetary policy has always been a key driver of economic growth and financial markets. But the approach of central banks has fundamentally changed in recent years. Stubbornly low interest rates have become the norm, and while long-term rates may rise somewhat in the near future, we are still in the midst of a secular shift to a lower-rate environment. You can see it in the steep fall in 10-year US Treasury yields over the past 40 years.
We believe this won’t end anytime soon. As we move deeper into the recovery from Covid-19, central banks have pledged to keep their monetary policy “easy” for an extended time, with low rates and elevated levels of liquidity in the financial system. Indeed, given the level of government indebtedness and the extent to which markets have become “hooked” on cheap money, few decision makers have the appetite to change. So if the environment becomes lower not just longer, but potentially forever, what are the implications? Are central banks simply the servants of governments as a new “state capitalism” takes hold? Most importantly for investors, how should they reposition their portfolios for the unfolding environment? And how can they push for higher yields and better overall returns while keeping risk in check? We’re using our proprietary research and expert insights to answer these and other pressing questions for clients.