Low Bond Yields Have Little to Do With Lax Monetary Policies

The general perception is that global bond yields are historically low because monetary policy has been aggressively eased. This leads to expectations that yields will rise -- possibly sharply -- once the Federal Reserve and the European Central Bank start the process they call “balance sheet normalization.” After all, when he was Fed chairman, Ben S. Bernanke spent a lot of time and effort trying to push bond yields lower. The same is true of the ECB’s Mario Draghi and the Bank of Japan’s Haruhiko Kuroda.

But there’s a strong case to be made that this perception is wrong. If lax monetary policy is not the reason, then why are yields so low? An examination of 10-year government bond yields based on quarterly data for 21 countries since 2000 shows that the phenomenon can be explained by three factors.