Against the backdrop of weak global growth and soft inflation, central banks have been biased towards loosening policy further or talking down the prospect of future tightening. Stimulus measures, however, have recently come into question as evidence suggests that unconventional monetary policy may have reached its limits.
For example, the Bank of Japan has recently moved away from a commitment to buy a xed quantity of government bonds and adopted a yield target instead. This may be more sustainable in the long-run, but re ects an inability to expand its government bond holdings inde nitely. Similarly, market participants have speculated that the European Central Bank may move to taper its bond purchases before long and have lost appetite for pushing interest rates to ever more negative levels.
As a consequence, many investors are beginning to look for fiscal policy to take a greater role in stimulating growth and are starting to call for a turn in the direction of interest rates and bond yields. Our view is that although we may have moved to an environment of less aggressive monetary easing, it is too soon to look for a decisive in ection point. Central banks will be cautious about changing direction given the risk of derailing the economic recovery, and scal policy is hard to expand quickly. Fiscal expansion may also be limited in some countries by debt levels, and requires a level of coordination which will challenge most governments.
Government bond yields, as a result, are adjusting to a less supportive policy environment, but are expected to remain largely range bound, with fair value only modestly above current yield levels.
A structural increase in yields will require either a rise in trend growth, a rise in trend inflation or a clearer change in the direction and mix of policy. None of these are likely to happen quickly, but we may now be at the end of a 35-year bull market for government bonds.
John Stopford is Head of Multi-Asset Income at Investec.