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LT Bond Yields And Growth To Stay Low Until Deflationary Headwinds Recede - History Says This Might Take A While

Since early 2013, we have published extensively about rising market risk, with the ironic caveat that macro and micro headline disappointment would serve to sustain zero-bound interest rate policy and central bank buying longer than the prevailing guidance, thereby supporting risk asset values. The Fed did delay tapering, and now the market grapples with the timing of rate hikes. We continue to expect sluggish US and gross world product demand growth, weak corporate earnings growth and high-and-rising geopolitical risk. The big question remains, at what point does the bearish effect of growth disappointment and deflationary pressure outweigh the leavening effect of ZIRP? Notwithstanding the loose relationship between the Fed Funds rate and the broader interest rate environment, the market sets yields based on expectations for future inflation. The recent periods of quantitative easing (QE) well illustrate the Fed's inability to sustainably thwart deflationary pressures. The yield trend-line on US 10… Read More …