April 2021 CIO Special
Financial repression: still restraining real rates Policy sustainability and the investment response CIO Special Financial repression: still restraining real rates Contents
Introduction p.2 Authors: 01 Christian Nolting Global Chief Investment Officer
Gerit Heinz 02 Financial repression: a history p.4 Global Chief Investment Strategist
Stefan Köhling Investment Strategist 03 Policy sustainability and risks p.10 Europe
Gabriel Selby, CFA® Investment Strategist Americas 04 Possible future scenarios p.13
05 What this means for investors p.15
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Past performance is not indicative of future returns. Forecasts are not a reliable indicator of future performance. Your capital may be at risk. Readers should refer to disclosures and risk warnings at the end of this document. Produced in April 2021. 1 CIO Special Financial repression: still restraining real rates 01 Introduction
Christian Nolting GDP growth will return to positive territory in 2021. Reflationary policies in response to the Global Chief Investment devastating economic impact of the coronavirus have already led markets to anticipate some pick Officer up inflation and, in many economies, yields have risen.
No-one, however, expects a quick return of interest rates to their levels of a few decades ago. In a historical context interest rates are still at extremely low levels and major central banks have indicated that they will be tolerant with regards to inflation and keep rates low. “Financial repression” – the use of policy to keep real interest rates very low or negative – is here to stay.
In some ways, it is surprising that “financial repression” is not more controversial. Low interest rates lower the cost of borrowing but, conversely, may also make it more difficult to reach investment goals. They affect debt levels and asset prices. This is an issue of great importance to all investors.
The main reason for general acceptance of “financial repression” is that we have probably just grown too used to it.
“Financial repression” long predates the 2020 pandemic: like some other policy issues, coronavirus has simply accelerated an existing underlying trend. It first came to prominence earlier at the start of the global financial crisis (GFC) in 2007-2008, when many central banks deployed financial repression (in the form of lower policy rates and quantitative easing) as an essentially tactical tool to try and kick start economies. Yields on government bonds been falling for a decade or more, when adjusted for inflation, as shown by Figure 1. They have also been falling in nominal terms.
Figure 1: 10-year inflation-indexed government bond yield comparison
Source: Bloomberg Finance L.P., Deutsche Bank AG. As of April 9, 2021.