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24 June 2019

Bob Cunneen, Senior Economist and Portfolio Specialist

Sources: Federal Reserve, St Louis and Datastream.

*The government bond yields are ten year constant maturities.

Global government bond yields are now so low that some investors are contemplating the possibility that the global economy is following the path set by Japan.

Japan has struggled to sustain solid economic growth and mild inflation over the last three decades. The combination of falling Japanese share and property prices since their peak in 1990, excessive corporate debt and a weak financial system has seen Japan’s economy stagnate. The sharp fall in the Japanese government ten year bond yield, to a current negative yield of -0.1%, is a troubling precedent for the rest of the world.

Germany also seems to be pricing in stagnation. German government bond yields are now actually below Japan’s at -0.3%. However these extraordinarily low German bond yields could also reflect Germany’s status as a ‘safe haven’ in Europe given various political risk factors such as Brexit as well as the Italian government’s debt woes.

Australia and the US still have positive bond yields currently. While this may be notionally encouraging, there is some cause for concern. Persistently low bond yields could imply that sedate economic growth and low inflation are likely over coming years. This is the risk of ‘turning Japanese’. Hence to avoid Japan’s fate of stagnation, there is considerable pressure on both the Australian and US central banks to cut interest rates soon to support growth.


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