In an economic update, Morningstar said that with the European Central Bank moving towards a quantitative easing (QE) program and Japan increasing the level of its bond purchasing, bond yields have fallen in both areas.
The report said 10-year German government bond yields are only at 0.74 per cent and that short-term bonds have turned negative in Austria, Belgium, Denmark, Finland, Germany, the Netherlands, Sweden and Switzerland.
“Even in the US, where the economy has been performing well and where the Fed has stopped its QE program and is likely to start gently raising short-term interest rates, the likelihood is that bond rates will rise only slowly and not by as much as previously thought,” said the report.
Morningstar said based on the consensus forecast from The Wall Street Journal’'s poll of forecasters, the 10-year bond rate will have only risen to 3.3 per cent by the end of next year.
“At the start of 2014, forecasters had been expecting the yield to have risen to 4 per cent by the end of 2015,” said the report.
This is the result of US inflation, according to Morningstar, which is lower than the central bank expected.
“The Journal's consensus forecast is for an inflation rate of only 2 per cent at the end of 2015,” said the report.
Morningstar said the UK is experiencing something similar, with the central bank likely to begin raising rates but also likely to tighten by less than expected.
“The good news, for bond investors, is that the day of reckoning – when global yields start moving back towards more normal levels, bringing capital losses in their train – has been deferred even further into the future,” said Morningstar.
“The bad news is that the running yield has become ever more unattractive.”
