Search for yield as rates drop further

BIS Quarterly Review  |  September 2012  | 
17 September 2012

During the period from mid-June to mid-September, the trajectory of global growth shifted downwards and concerns about the sustainability of euro area government debt and the future of the monetary union gained new traction. Against the backdrop of lower growth, many central banks loosened monetary policy, cutting interest rates or expanding unconventional policies. Some of the policy measures and announcements triggered large asset price reactions.

Together with central bank actions, the combination of weak growth and portfolio reallocations driven by concerns about sovereign risk in the euro area pushed yields on the debt of a number of highly rated sovereigns to unprecedented lows. In a range of European countries, nominal yields on short-term government bonds were even deep in negative territory. Such low yields on advanced economy government bonds spurred investors to search for investment opportunities that offered some extra return. The result was a rally in equities and corporate bonds. Search for yield may also partly explain the extraordinarily low volatility in credit, foreign exchange and equity markets over the past several months.