NEW HAVEN The prices of long term government bonds have been running very high in recent years (that is, their yields have been very low). In the United States, the 30 year Treasury bond yield reached a record low (since the Federal Reserve series began in 1972) of 2.25 on January 30.

Even if the Fed ignores deflationary pressure and hikes interest rates more quickly, medium and long term rates are still likely to be anchored, given how little yield is available elsewhere in the world. Yields on German Bunds are now negative out to eight years.

The low interest rate on long term Treasury bonds has also boosted demand for other long term assets that promise higher yields, including equities, farm land, high yield corporate bonds, gold, and real estate. When interest rates rise, the prices of those assets will fall as well.

Second, with low interest rates causing vast sums of money to chase so few opportunities for decent yields, it is understandable that investors have turned to government bonds, thereby driving down yields still further. But this situation cannot last forever if the flow of funds slows, or alternative, higher yielding assets become available, demand for government bonds could drop markedly.

Investors are buying long term bonds at the current low interest rates because the interest rate on short term investments is now close to zero. In other words, buyers are getting an additional 2 current yield in exchange for assuming the risk of holding long term bonds.

Finally, the key to the success of financial stabilization was a profound restructuring. Hamilton estimated that the federal government could raise enough revenues to pay approximately 4 interest on the total amount of debt to be serviced significantly less than the 6 yield on the existing obligations.

In fact, the 30 year inflation indexed US government bond yield as of May 4 was only 0.86 , compared with more than 4 in the year 2000. Such rates are similarly low today in many countries.

After the government announced its plan, the euro fell to its lowest level in nearly two weeks on Friday, while the Italian bond yields hit their highest level in three weeks.

Interest payments on the debt eventually become so burdensome that bondholders demand higher interest payments (Greek debt recently yielded over 30 ). Interest rates on US government debt remain low, so this threat is prospective, but future deficits will be far higher than government projections when rates normalize.

It was also mentioned that on a 25 year basis the rate of return on bonds and equities had been almost equal.

With the price level falling and the population aging, the Japanese consider the real return attractive. As long as US banks can borrow at near zero and buy government bonds without having to commit equity, and the dollar does not depreciate against the renminbi, interest rates on US government bonds may well be heading in the same direction.

The real reason why Japanese interest rates are so low is that Japan s private sector has little appetite for investing abroad and prefers ten year government bonds at 1 to cash at 0 . With the price level falling and the population aging, the Japanese consider the real return attractive.

So, the prescription goes, why not generate higher inflation for a while? This will surprise fixed income investors who agreed in the past to lend long term at low rates, bring down the real value of debt, and eliminate debt overhang, thereby re starting growth.

In most cases, fiscal deficits and lower export earnings were responsible for a deterioration of debt ratios.

Debt and low per capita income adjustment

Among the fisheries with the most inefficient edible protein return on investment, vessels targeting shrimp, tuna and swordfish are at the top of the list.

Lower interest rates on loans are available in capital markets to borrowers who have ample debt service coverage , which is defined as total revenues available for debt service as a percentage of the required debt service.

Japan s government is able to pay such a low rate of interest because domestic prices have been falling for more than a decade, while the yen has been strengthening against other major currencies. Domestic deflation means that the real interest rate on Japanese bonds is higher than the nominal rate.

Given that the assets and liabilities of the Fund are expressed in United States dollars, it is appropriate to develop the assumptions by reference to yields available on United States long term Government Bonds.

These allocation decisions are understandable, given the paltry yields available in fixed income investments, but the resulting second order impact could ultimately prove devastating.

It is true that extraordinarily low long term bond yields put us outside the range of historical experience. But so would a scenario in which a sudden bond market crash drags down prices of stocks and housing.

Over the past 20 years, the first component of the benchmark, the Morgan Stanley Capital International World Index, had achieved a total annualized return of 14.6 per cent compared to 14.1 per cent achieved by the Fund apos s total equities. The second component, the Salomon Brothers World Government Bond Index, had achieved a total annualized return of 9.9 per cent compared to a total annualized return of 10.9 per cent achieved by the Fund apos s bond portfolio.

An additional criterion is a ratio of present value of debt to government revenue of 280 per cent (together with additional conditions related to a ratio of government revenue to gross domestic product (GDP) of 20 per cent and a ratio of exports to GDP of 40 per cent).

While this is still a relatively new series of investment vehicles and the volume of the available long term bond is somewhat limited, the yields on these bonds present a suitable starting point in developing the required prudent real return assumption.

After all, corporate borrowers do not borrow at the risk free yield of, say, US Treasury bonds, and evidence shows that monetary expansion can push down the interest rate on government debt, but have hardly any effect on new bank lending to firms or households. In fact, the causality is the reverse the reason why government interest rates in the UK and elsewhere are so low is that interest rates for private sector loans are so high.

He supported the reduction of the floor rate to 0.001 per cent, the maintenance of the ceiling at 25 per cent, and the practice of basing the low per capita income adjustment and the debt burden adjustment on the actual volume of debt of Member States.

Low income rates have also been on the decline for those groups more likely to experience low income.

The Fund apos s real estate investments outperformed both bonds and cash during the biennium, with a total return of 8.6 per cent for the year ending 31 March 1997 and 18.9 per cent for the year ended 31 March 1998.

The stock market s recent performance often is attributed to the unconventional monetary policies that many central banks have been pursuing. These policies, by design, lowered the return on sovereign bonds, forcing investors to seek yield in markets for higher risk assets like equities, lower rated bonds, and foreign securities.

African stock markets were undervalued their price earnings ratios were considerably lower than those of the Standard and Poor 500, though their rate of return in 2003 and 2004 had been considerably higher than the rate in Latin America or Europe.

At the moment, the yield to maturity of the ten year US Treasury bond is 3.76 . Subtract 2.5 for inflation, and you get a benchmark expected real return of 1.26 .

Debt, low per capita income adjustment with positive gradient and LDC adjustment

Low and middle income families will benefit from a notable increase in disposable income.

Thus, the expected fundamental real return on diversified US stock portfolios right now is in the range of 6 to 7 . The expected market return is that amount plus or minus expected changes in valuation ratios will stocks return more as price earnings ratios rise, or return less as price earnings ratios fall?

Assumed rate of real return (Millions of United States dollars)

The ceiling had the same distorting effect as the floor rate, benefiting the largest contributor and imposing an undue burden on the low income countries.

At the same time, it is also imperative to see that having experienced the big bull market of bonds for two years, the yield rate of the fixed income market this year is hard to reach the level two years ago and the fluctuation range will increase at the same time. So on the whole, yield curve takes on a flat feature.

Indeed, Germany s 30 year bund yield is less than 0.7 , indicating that they expect ultra low rates for a very long time. And many issuers are extending the maturity structure of their obligations to lock in current rates, which cannot go much lower (but could potentially increase a lot).

d A low indicator is a reflection that insufficient cash is available to settle debts.

f A low indicator is a positive reflection that obligations are being liquidated.

The problem is that unconventional monetary policies in some major economies have created a low yield environment, leaving investors somewhat desperate for high yield options. Many pension funds are underwater, because the returns required to meet their longer term liabilities seem unattainable.

Lending to the emerging economies is hardly attractive, either, with even the riskiest economies offering low hard currency yields. Indeed, even Russia whose military intervention in Ukraine has led the West to impose strict economic sanctions offers annual yield of less than 6 on ten year bonds.

They buttress their argument that the deficit is not an immediate problem by pointing to very low interest rates on long term government debt, with a 2 yield on the ten year Treasury bond and a negative real interest rate on Treasury inflation protected bonds (TIPS). But such low rates do not reflect ordinary market sentiment rather, they stem from the fact that the Federal Reserve is now buying more long term securities than the government is issuing to finance the budget deficit.

Low real long term rates mean that any long term asset that pays, say, 100 a year in real terms would have been worth a real 1,429 in 1984, when it yielded 7 , but would have to be worth a real 5,000 now, when it yields just 2 . A decline in long term rates of such magnitude would thus appear to imply massive price inflation for real assets, justifying the high prices we are in fact seeing.

13. Currently, the 30 year United States inflation indexed Government Bond yields a quot real quot return to maturity of approximately 3.6 per cent per annum.