Granted, European rates are low, even extremely low, and not only key rates, which are virtually zero, but also long-term rates. As a result, the accumulation of wealth generated by the reinvestment of interest payments and bond coupons has slowed sharply.
Virtually no government bonds offering a nominal yield of more than 1.5%
With interest rates at 4%, it takes about 18 years to double the value of a bond portfolio. With rates at 1%, it takes around 70 years. In the eurozone, with the exception of Greece, there are no virtually no government bonds offering a nominal yield of more than 1.5%, a measure of long-term expected inflation, even instruments with very long maturities. The consequences are tough: with negative real interest rates, it is impossible for European households to protect themselves against expected inflation without accepting other types of risk, such as issuer risk.
Tempting to lay the blame on the central bank
In the light of this observation, it is tempting to lay the blame on the central bank, whose actions helped bring down long-term rates (first by lowering key rates, and now via quantitative easing). It is worth recalling, however, that long-term rates are broken down into a real rate, the expected inflation rate and a risk premium (for making a long-term commitment). In the absence of ECB action, expected inflation would be even lower, and possibly even negative. The same goes for real rates, which are closely linked to growth prospects. Real interest rates are low because growth prospects have been sluggish for such a long time. The co-existence of surplus savings (because consumers are conservative) and subdued levels of corporate investment puts downward pressure on interest rates.
Pave the way for the normalisation of monetary policy
The abundant liquidity created by the central banks is also to blame, but once again, these policies originated to combat sluggish growth and the risk of deflation. For real bond yields to pick up, there must be a net and sustainable improvement in economic growth, which would also eventually pave the way for the normalisation of monetary policy. This will be a very long process, especially since the central banks, beginning with the Federal Reserve, must first be convinced that the economy no longer needs the safety net of low interest rates. Investors face a dilemma: they can either wait until interest rates pick up sufficiently, which will require a lot of patience, or they can accept a little more risk now based on the assumption that the European economic recovery, which is gaining strength day after day, will translate into earnings growth for companies listed on the equity markets.
