The threat of persistently low short-term rates will hold down bond yields, in part simply because long-term yields should be equal to expected short-term rates. And because UK gilts are close substitutes for overseas government bonds, low yields in Japan and the euro area will keep gilt yields low.
These pressures, says Russell Jones at Llewellyn Consulting, will be reinforced by the fact that some of the causes of low yields will remain in place. He believes there will continue to be a global shortage of safe assets, and that the Fed will not sell the bonds it bought when it was quantitatively easing. Any rise in long-term yields will, he says, be "limited".
With bond yields already negative in real terms - 10-year index-linked gilts yield minus 0.6 per cent - this means investors could face years of negative real returns on safe assets. This, says Mr Jones, raises the danger of more financial instability if investors respond by overinvesting in riskier assets.
