Policy errors stunt bond yields, says academic

Global monetary policy error is the biggest factor behind today’s low global bond yields, says Andrew Clare, professor of finance at the Cass Business School.

While high saving in East Asia and a possible labour market shock are also factors underpinning low yields, he says: “The Federal Reserve kept interest rates too low for too long, which was an error on their part.”

As a result, Clare forecasts bond yields to stay at these low levels for some time. Representing a better area to invest is British equities, according to Clare. “There is now better value in the FTSE 100 compared to the last time it hit the 6000 mark in 1998,” he says. “I am more comfortable about UK equities than I am American equities.”

However, one UK-specific factor has led to potential problems in future corporate growth. Heavy exposure of defined benefit pension schemes to equi- ties during the tech, media and telecoms boom, and the ensuing market correction, has resulted in many schemes having large deficits. To address this short- fall, companies have had to cut down on capital expenditure and divert assets into their pension plans. Clare estimates that British companies will invest up to 60bn into retirement plans this year.

Low bond yields have led to a higher equity risk premium, with shares looking more attractive than bonds, argues Clare. But appetite for risk is high and the carry trade of borrowing in lower-yielding developed nations and investing in many higher-yielding developing countries has contributed to high valuation in many emerging markets. The trailing price/earnings ratio of emerging market equities is about twice that of the British market and a correction in developing stockmarkets is possible.

In an environment of low bond yields and poorly performing government bonds, Clare urges investors not to be afraid of investing in cash.