What are the similarities in the yields of government debt instruments during the global financial crisis and now?

[Grace A 0]

[Ignatius Bose 0]

In a bid to stem the escalation of the 2007-2008 financial crisis and prevent the global economy from a systematic collapse, central banks across the world slashed interest rates to record lows following the crisis. The low-interest rates caused yields on government securities to plunge to never-before-seen levels with some securities even offering negative yields. While the purpose was to dissuade investors from participating in these debt instruments and look for potential alternate securities like corporate debt, equities and even longer-term investments like real-estate, the idea was successful in the long-run. With markets slowly stabilising, investors exited these government securities and plunged into the higher yielding risky assets, and while equities markets soared, the low-interest rates pushed households to invest in automobiles and homes, boosting business investment and job creation, thereby contributing to broader economic growth.

Markets are in an identical setup today with yields on a large number of benchmark government securities falling into negative territory. Based on Bloomberg data, the value of government debt with yields below zero stands close to $12tn as of 17th June. While this reflects negative investor sentiment in the backdrop of the US-China trade conflict, central banks are pulling out all the stops by loosening monetary policy and providing stimulus in a bid to boost domestic consumption and drive inflation.

On Tuesday, the yields on the Austrian and French 10-year bonds slipped below zero for the first time in history, joining the German and Japanese sovereign benchmarks. In the absence of a catalyst, and with mounting debt weighing on growth and inflation, analysts expect the yields on government paper to remain near record lows for an extended period.

[Elvie Giernoth 0]

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Edited January 12 by Elvie Giernoth