In our most recent quarterly letter, we argued that low prevailing rates on sovereign debt around the world have lowered the opportunity cost for other assets, leading investors to bid up all asset prices. These sovereign rates have continued to fall into the New Year. Where to from here?
Bond yields around the world are hitting historic lows Tuesday. Leading the charge is Europe, where bond prices are rallying as crashing oil prices sour the outlook for inflation and make it increasingly likely the European Central Bank will deliver on President Mario Draghi’s promise to do “whatever it takes” to save the Eurozone. That promise is expected to come to fruition via a U.S.-like stimulus program where the ECB buys sovereign debt. Fears of Greece leaving the Eurozone have also contributed to the drop in yields in recent days. (Bond yields fall when prices rise.)
The 10-year yields for German, French, Italian, Spanish, Japanese and Australian bonds, among others, are at the lowest levels on record.