Lower for longer: Covid-19 to weigh on interest rates

Lower for longer: Covid-19 to weigh on interest rates

In the wake of Covid-19, developed markets’ long-term yields have fallen significantly. However, market participants seem uncertain how to integrate the ensuing massive fiscal and monetary easing in their medium-term rates expectations. There should be a persistently low interest rate environment over the next few years; the massive, prolonged intervention of central banks on global government bonds will remain a major factor. However, the additional flows of risk-averse private financial savings will also exert a remarkable downside pressure on long-term yields. In the Eurozone, the cumulative flow of private financial savings has so far exceeded the volume of QE. It is expected that the rapidly growing amount of fresh financial savings won’t be matched by a proportional increase in the free float of safe assets.

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