There is a frequently cited rule of thumb that says government bond yields should roughly correspond to nominal growth domestic product growth. However, this rule does not describe an exact correlation but rather a structural, long-term relationship between the financial markets and the real economy. The yields of government bonds are linked to a country’s economic activity based on various impact channels.
In the long term, therefore, yields tend to follow the trend predetermined by potential growth. Potential growth worldwide is in turn shaped by structural changes and has been on a downward trajectory for a number of years. This is due above all to low productivity growth and persistently weak investment.
However, the shift in the segments‘ shares in gross domestic product in the developed countries – away from manufacturing to the service sector – has reduced potential growth. Besides these real economic factors, low inflation momentum also plays a key role in the continuing decline in the growth path of nominal GDP. Globalisation and demographic developments have led to structurally weak, wage-driven inflation.
In addition to these structural parameters, the consequences of the crisis affecting financial markets are also defining the current yield environment. The expansionary measures pursued by the central banks and sustained high investment surplus on the part of private investors have led to a very significant reduction in real yields, even though the central banks for their part have responded to the macroeconomic environment and are therefore not the sole cause of the development. Furthermore, only moderate lending growth in recent years due to low levels of investment is unable to keep pace with the further increase in the investors‘ investment requirements.
Potential growth is likely to remain low or even decline further in the years ahead. Demographic change will proceed in the years to come and growth will weaken additionally on the back of stagnating population figures. It will take some time before inflation returns towards the 2% mark. The central banks‘ interest rate policy is currently taking account of the changed economic environment. Although we will have monetary tightening cycles also in the future, the absolute level of key rates will be much lower compared to previous periods. The low yield environment is set to remain with us for some time to come.