The response is likely to be continued easy money and efforts to keep yields low, somewhat similar to the Fed’s quantitative easing. Interest rates are likely to remain low, possibly lower than in either the US or the UK.
For investors these developments raise several questions. While many are anxiously awaiting the return of higher yields on relatively safe instruments such as US treasuries, things will not be simple.
As interest rates climb, bond prices drop. An investor who rushes into bonds at the first sign of rising yields may be rudely disappointed as capital losses driven by rising yields mount. Investors may hold off until they believe the rise in yields is almost over and then rush into bonds. This could cause a momentary pop in prices and temporally lower yields.
In short, timing the re-entry into some segments of the fixed income markets will be challenging. The differing patterns of yields in the US, the UK and the euro area will also provide some questions. If, as seems to be expected, yield turn up in the UK first while in the euro area they lag behind the US, there could be some shifts in both corporate issuance and investor preferences.
By the beginning of 2016, the fixed income landscape is likely to be quite different. Treasuries and sovereign issues that pay a positive real yield would be welcome despite the puzzles they will bring.
This article was written by David Blitzer, chairman of the index committee, S&P Dow Jones Indices.
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