The Global Financial Crisis (GFC) has ushered in a period of historically low interest rates. This is good news for borrowers and users of capital. It’s not such good news for investors and savers. The result has been a “global hunt for yield”, which sees investors scanning financial and asset markets for income-generating opportunities.

It’s a nice parable. But like many parables, reality is a bit more complex.

Consider the chart.

Figure: Yields on bonds and office markets

Source: IMF, JLL Research

Based on International Monetary Fund (IMF) calculations real (inflation) adjusted sovereign bond rates have been falling for more than thirty years. Admittedly the GFC shows up as a sharp dip in real bond yields in 2008. But it’s just a part of a much longer story that tells of a generation-long decline in real long term bond rates. In contrast, prime yields averaged across a sample of major office markets have remained remarkably stable, at between 4.50% and 7.50%.

So the global hunt for yield is not simply a post-GFC event. Certainly the low interest rate world that has been ushered in, has added an extra twist to the “global hunt for yield”. But it’s a chapter in a much longer story. And for income-seeking investors, the relative attractiveness of commercial real estate has been rising steadily, not just since the GFC, but for a generation.

But there is another twist to this story. Falling bond yields mean that bond values have been rising. So the past thirty years has been a bull market for bonds, as a broad global statement. Issuers of long term bonds have had a thirty-year tail wind; and falling bond yields mean that investors in these bonds have had a thirty year ride on rising capital values.

It’s salutary to reflect that most people reading this blog will have spent their business careers in a world where real interest rates (and so, the hurdle rate for investment) have been falling steadily. But policy interest rates in the major economies – the UK, US, Japan and the Eurozone are now at or close to what central bankers call the ZLB – the zero lower bound. And real long term bond rates, which are the effective hurdle rate for commercial real estate investment, are close to zero too.

Is the bond market party over?

A trend is a trend is a trend
But the question is, will it bend?
Will it alter its course through some unforseen force,
And come to a premature end?

Sir Alec Cairncross

Unlike short term central bank nominal policy rates, long term real bond rates can go negative as was the case in the 1970s. And in the US, the UK and Japan this has been the post-GFC experience.

The GFC has certainly given added impetus to the “global hunt for yield”. But it’s not the full story. And if the thirty-year bull market in bonds is now over, it’s possible that investors will be looking for alternative yield investments with low volatility income streams, like commercial real estate, for a long time to come.

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