The last few weeks have seen a further collapse in government bond yields, especially at the front end of some European yield curves, where the ECB’s decision to cut deposit rates to zero has clearly had important effects on interest rates. How low can bond yields now go? ECB board member Benoit Coeure said on Friday that the ECB might cut rates to below zero. He said that the central bank is closely observing events in Denmark, where two year yields have dropped into negative territory, as they have in Switzerland.
Despite the fact that policy rates might drop below zero, it is common to hear in the financial markets that government bond markets are in bubble territory, with equities being “so cheap” relative to bonds that equities are virtually certain to out-perform bonds by a wide margin in the years ahead. Although I have said this myself on many occasions, I am now beginning to wonder whether it is true. Read more