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Low bond yields here to stay, warns expert

Global bond yields are at historic lows and are unlikely to improve any time soon, according to one expert.

ABC Bullion’s global general manager Nicholas Frappell says interest rates will stay low for the foreseeable future, with a search for higher yields sending investors elsewhere.

“It used to be an iron rule that when you lent someone money, you were compensated in the form of interest. That’s no longer the case anymore,” Mr Frappell said.

“We now live in a world where interest rates are very close to zero and in the developing world there is almost US$10 trillion in negative yielding debt.”

Mr Frappell said the recent emergence of negative yielding debt in Europe is likely to continue.

“A fortnight ago, the German government sold the equivalent of A$6 billion of ten-year debt at a negative interest rate of five basis points.

“It’s the first time they’ve ever done that and it’s likely to become the new norm in the eurozone.”

Low interest rates both in Australia and overseas are also likely to remain.

Mr Frappell believes that with enormous US-denominated debt worldwide, the US Federal Reserve would be cautious in its decision to hand on rate hikes for the near future.

“Each rise makes that debt more and more expensive, pushing the bubble higher which could spur problems in emerging markets that they absolutely wish to avoid.”

Mr Frappell predicted the bond market would become increasingly unattractive as certain trends continue.

“The reality here is that there’s actually a limit on just how much debt and how many bonds are eligible for purchase by the European Central Bank,” he said.

“This scarcity will push bond prices higher and hence yields lower, lasting at least until the first quarter of 2017 but almost certainly for much longer if past experience has been any kind of reliable guide.”

Low bond yields here to stay, warns expert
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