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Chart of the week: “We can’t continue this love affair, Mr. Bond”

January 2018

Bob Cunneen, Senior Economist and Portfolio Specialist

Bond yields vs quantitative easing

Sources: Reuters Datastream , Federal Reserve St Louis , RBA, Yardeni Research

Since the Global Financial Crisis, the major global central banks in the US, Europe and Japan have aggressively engaged in quantitative easing and have been very successful in lowering global government bond yields.

Through bond buying, a form of quantitative easing, these G3 central banks have acquired nearly US$10 trillion in assets since 2008 taking their average balance sheet size from 11% of nominal GDP in 2007 to 39% at the end of 2017 (inverted red line).

Australian government bonds have also benefited from the global drive for lower yields. Australia’s 10 year bond achieved its lowest yield since Federation in 1901 with a yield of only 1.82% in August 2016 (black line).

However this avalanche of government bond buying now appears to be coming to a close with the Fed, the European Central Bank and the Bank of Japan all looking to scale back. This could see global and Australian bond yields coming under significant upward pressure over coming years, and could mean lower returns for bond investors.

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