Report comment

I don’t believe long term rates in the euro area will stay so low for an extended period of time. Monetary policy shouldn’t be meant to create growth but to restore growth and confidence to the extent that people are afraid to behave the way they normally would. To me , when central banks intervene in markets to such a large degree as they have since the financial crisis , they distort normal market signals in capital allocation : investing everyday in HY bonds of the euro area , I see that risk-reward correlation has completely broken out. Nowadays BB rating asset class yields from 2.05% to 2.10% in a 7year duration …! But keeping nominal rates too low for too long has some bad effects: 1) it makes market participants complacent about the future , because they believe that central banks will continue to intervene in the markets, and that encourages risk-taking behavior and creates financial bubbles ( for example in the credit markets as I mentioned before ). 2) keeping real rates too low for too long incentivizes increasing savings ( consumers do not buy goods today, waiting for lower prices tomorrow ) and maintaining low factory orders , which further create deflationary pressure. 3) Finally, the historic central bank policies create their own systemic risk because lower long-term yields extend the duration of long-maturity assets , keeping duration risk in the investor's portfolios extremely high . This last issue is strictly correlated with “liquidity” issue: when long term rates will go up , there will be a “on-side market “ . All sellers , no buyers . This leads to huge asset price distortions, because governative bonds are benchmarks, they are the bedrock upon which we price everything else, whether it’s discount rates for pension liabilities or equities