Will real bond yields come back down?
“Demographic trends and weak productivity growth should continue to drive real interest rates.”
Real, or inflation-adjusted, bond yields are higher than they were before the pandemic, but are likely to return to pre-Covid levels in the medium term, when inflation returns to major central banks’ 2% target.
Those who doubt policymakers will hit their inflation goals point to de-globalisation, structural changes in supply chains, higher public debt, and larger pay settlements. These are valid concerns, but won’t result in permanently higher inflation unless demand for goods and services were also to settle at higher levels. There is so far little evidence that this will be the case.
Meanwhile, those who question whether real yields will fall may point to the need for higher investment to manage the energy transition, potentially higher defence spending in a geopolitically fragmented world, and the costs of servicing very high public debt. Some also worry about a sustained rise in wages.
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