World markets may have recovered their poise from a torrid start to the year, but their outlook for global growth and inflation is now so bleak they are betting on developed world interest rates remaining near zero for up to another decade.
Even though the U.S. Federal Reserve has already started what it expects will be a series of interest rate rises, markets appear to have bought into a "secular stagnation" thesis floated by former U.S. Treasury Secretary Larry Summers.
The idea posits that the world is entering a peculiarly prolonged period in which structurally low inflation and wage growth––hampered by aging populations and slowing productivity growth––means the inflation-adjusted interest rate needed to stimulate economic demand may be far below zero.
As there's likely a lower limit to nominal interest rates just below zero––because it's cheaper to hold physical cash and bank profitability starts to ebb––then even these zero rates do not gain traction on demand.
For all the debate about the accuracy of that view, it's already playing out in world markets, with long-term projections from the interest rate swaps market showing developed world interest rates stuck near zero for several years.
Take overnight interest rate swaps. They imply European Central Bank policy rates won't get back above 0.5 percent for around 13 years and aren't even expected to be much above 1 percent for at least 60 years.
Japan's main interest rate won't reach 0.5 percent for at least 30 years, they suggest, and even U.S. and UK rates are set to remain low for years. It will be six years before U.S. rates return to 1 percent, and a decade until UK rates reach that level.
"Although interest rates are low, they're not accommodative," said Harvinder Sian, global rates strategist at Citi in London. "The era of zero rates will be with us for years and years, it wouldn't surprise me if we're looking at another five to 10 years."
The five countries or economic blocs currently with negative deposit rates have yields below zero on all their bonds from a minimum of five years' maturity (Denmark) to a maximum of 20 years (Switzerland).