One of these responses has been to look for higher-yielding assets; Chris Iggo at Axa Investment Managers says shorter-dated corporate bonds are attracting interest.
This is dangerous. Higher yields mean higher risk. This risk might be ordinary price volatility. Or it could be the "tail risk" of default or debt restructuring. Or it could be liquidity risk, the danger of not being able to sell in an emergency; remember, the reason why the Bank of England decided not to buy corporate bonds as part of its quantitative easing policy was precisely that the market is insufficiently liquid.
Yields on top-quality government bonds are low now precisely because the market believes risks such as these are so high that it wants to avoid them. One reason for this is that the euro area's recession seems to be getting worse; this is the message of surveys of both purchasing managers across the region and of German businesses. And despite ECB president Mario Draghi's promise to do "whatever it takes" to save the euro, the risk of it breaking up is high. Citigroup's chief economist Willem Buiter puts the odds on a Greek exit at 90 per cent. He’s not much more pessimistic than the consensus, which according to prediction market-maker Intrade, puts the change at 60.5 per cent.
If these risks to high-yielding assets don't materialize, then of course they will do very well. But such returns would only be a reward for taking on what the market judges to be considerable risk. The key question for anyone thinking of buying yield is: is the market irrationally over-estimating these risks and so under-pricing risky assets? Yes, it might be that herding and over-reaction are causing them to do so. But the evidence for this is not overwhelming.
My concern is that, in the absence of a strong answer to this question, buying of risky assets is motivated by a blind hunt for yield, rather than a considered judgment of risk. Mr Draghi's words might have encouraged this, insofar as they have given investors the confidence to buy risky peripheral European bonds and thus take on tail risk.
And this is where history might be repeating itself. It was the hunt for yield that played a big part in causing the crisis. In the mid-00s, yields on safer government bonds fell, prompting banks to want higher yields. This led them to buy mortgage derivatives, oblivious to the fact that their higher yields were merely the counterpart of higher risk – in particular liquidity risk.
Which brings us to a paradox. Although it's widely thought that the world has too much debt, in one sense our problems are the result of too little of it. As MIT's Ricardo Cabellero has said, the global economy has in recent years suffered from a shortage of safe assets. This year, for example, the world will generate over $17 trillion of new savings, but issues of top-quality government bonds such as those of Germany, the UK and (yes) US will amount to less than $2 trillion. The very fact that prices of northern European government bonds are sky-high is a sign that such assets are scarce. With safe assets offering so little return, there's a danger of excessive buying of speculative assets.
There is, technically, a simple solution here – for northern Europe to issue more bonds. One reason for it to do so is that the conversion of peripheral government debt into Eurobonds guaranteed by the whole of the euro zone should be part of a solution to the euro’s crisis. Another reason is that the euro area needs a fiscal expansion in the north not just for ordinary counter-recessionary reasons, but also to raise inflation in the north relative to the south, thus helping relieve the latter's lack of competitiveness.
Such an increased supply of bonds would also help satisfy the world's demand for safe assets and - insofar as the extra supply helps to raise yields - it would satisfy investors' demand for yield without them having to take more risk which could destabilize the financial system.
Many of our economic problems (such as low productivity growth) are intractable. But some aren't.
