One of the classic mistakes people make while driving is to fail to look far enough ahead. It is all too common for drivers to fixate on what is just in front of them rather than scanning further in the distance. Often they only look as far ahead as they would if they were walking, except they are travelling at a far faster pace. As a result they sometimes fail to react to problems in sufficient time.

If anything this excessively close focus is even more pronounced in the bond markets. It is all too easy to fixate on one or two short-term indicators rather than try to take a longer view. In relation to fixed income the obvious example is the US federal funds rate. The amount of time and space spent speculating on possible moves by the Federal Reserve to move this one interest rate is astounding. That is not to claim it is unimportant but it is only one measure among many.

Of course in the markets it is impossible to get anything like perfect foresight. The future is by its nature uncertain. But it is possible to peer into the past to help put the present into its proper perspective. That indeed is a key purpose of history.

A better starting point is the graph on global long-term real interest rates on page 2 of this report. From this it is clear that, in some respects at least, global interest rates are at a turning point. They have trended downwards since the early 1980s (interrupted by a spike in the bond turmoil year of 1994) and it is likely that they will start turning upwards soon. 

Less often noticed is the period that preceded the peak. In the 1970s real interest rates turned sharply negative. This was a time of economic crisis and high inflation. In broader historical terms it represented the end of the post-war boom of the 1950s and 1960s. This context is important to appreciate because the 1970s was the key transition decade. What has come since can be seen, at least in part, as a reaction to what happened then. The world entered a long period in which credit steadily came to play a greater role. 

The immediate question is whether this trend of long-term credit expansion can continue much further. If it does start reversing, with yields beginning to rise, what path is it likely to take? The consensus view is that there will be a gentle shift upwards. But if it continues, which is conceivable though hard to imagine, it raises the question of what new forms credit growth can take.

None of this historical context is meant as an evasion of discussing the present. On the contrary, it is vital if the current conjuncture is to be properly understood. Perhaps the one certainty is that these times are particularly peculiar.

Daniel Ben-Ami, Deputy Editor, IPE