Global Multi-Asset Viewpoint
Secular Outlook for Bond Yields: Structurally Higher

Global Multi-Asset Viewpoint

Secular Outlook for Bond Yields: Structurally Higher

It is well known that government bond yields in advanced economies tend to be closely linked to nominal GDP growth. It is less well known that this relationship has been unsteady over time. Economic theory (as in Solow Growth Model) postulates that bond yields should equal nominal GDP growth, and many market participants concur. But in reality the relationship between government bond yields and nominal GDP (we refer to this differential as the “yield -GDP gap”) has experienced six distinct regime shifts since the beginning of the 20th century. Our analysis shows that two factors best explain these regime shifts: 1) the trend in inflation, and 2) the pace of aggregate debt growth (in relation to the size of the economy). In other words, the faster debt grows relative to GDP, the higher the bond yields for a given pace of nominal GDP growth. And the lower inflation has been in the prior period, the lower the yield-GDP gap will be. At present, when taking into account a likely acceleration in debt to GDP growth which would contribute to structurally higher rates, and the (partially offsetting) impact of low inflation over the last decade, we estimate that over the next 5 years, the average yield-GDP gap will rise 80 basis points, suggesting the U.S. 10-year yield could reach 3.5-3.7% by 2023.

The views and opinions are those of the author as of the date of publication and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers.

This general communication, which is not impartial, is for informational and educational purposes only, not a recommendation. Information does not address financial objectives, situation or specific needs of individual investors.

Any charts and graphs provided are for illustrative purposes only. Any performance quoted represents past performance. Past performance does not guarantee future results. All investments involve risks, including the possible loss of principal.

Prior to making any investment decision, investors should carefully review the strategy’s / product’s relevant offering document. For the complete content and important disclosures, refer to the link above.

It is important that users read the Terms of Use before proceeding as it explains certain legal and regulatory restrictions applicable to the dissemination of information pertaining to Morgan Stanley Investment Management's investment products.

The services described on this website may not be available in all jurisdictions or to all persons. For further details, please see our Terms of Use.

Not FDIC Insured—Offer No Bank Guarantee—May Lose Value
Not Insured By Any Federal Government Agency—Not A Deposit

Privacy & Cookies    •    Terms of Use

©  Morgan Stanley. All rights reserved.

Morgan Stanley Distribution, Inc. Member FINRA/SIPC.