Central bankers are threatening the engine of the economy
The private sector may be reluctant to invest because of a host of secular forces that increase risk, including ageing populations that temper consumer spending and an anti-globalisation trend of which the Brexit vote is an example. Savvy corporate chief investment officers who know anything about bond pricing may also recognise that an investment in the real economy — albeit at historically low borrowing costs — will pose its own risks once yields begin to return to normal and borrowing costs increase.
There are other obvious drawbacks to near-zero yields and interest rates. Historic business models with long-term liabilities — such as insurance companies and pension funds — are increasingly at risk because they have assumed higher future returns and will be left holding the short straw if yields and rates fail to return to more normal levels.
The profits of these businesses will be affected as will the real economy. Job cuts, higher insurance premiums, reduced pension benefits and increasing defaults: all have the potential to turn a once virtuous circle into a cycle of stagnation and decay.
Central bankers are late to this logical conclusion. They, like most individuals, would prefer to pay later than now. But, by pursuing a policy of more QE and lower and lower yields, they may find that the global economic engine will sputter instead of speed up. A change of filters and monetary policy logic is urgently required.
The writer is the portfolio manager of the Janus Capital Group Global Unconstrained Bond fund strategy