Courtesy of Chris Joye:
“Another major financial market milestone just evaporated as the relentless search for safe yields – and the increasing prevalence of negative 10-year government bond yields – fuels the bid for Australia’s highly-rated bonds that pay attractive risk-adjusted returns in a global context,” says Charlie Jamieson, a top-performing sovereign fixed-income fund manager. (Brexit, which we will return to later, has also helped intensify this bid.)
His partner at the eponymous Jamieson Coote Bonds, Angus Coote, adds that breaking through the 2 per cent yield floor “is massive because it demonstrates we can go much lower”.
“Negative interest rates were a mind-melt for bond investors yet they have become the norm in places like Germany and Japan, which makes our AAA-rated government bonds with circa 2 per cent yields stand out like a bull’s balls,” the ever-blunt Coote continues.
This is a big deal for every asset class because the risk-free rate used to price future cashflows – or discount them back to the present as a representation of the minimum opportunity cost of capital – appears to be shrinking.
In theory, lower through-the-cycle risk-free rates mean higher valuations for all asset classes (all things being equal), including corporate bonds, listed equities, private equity, commercial property and housing.
Is it a bubble if rates never rise again?
Anyways, yes, I agree yields can go much lower.
