The market will be able to see more clearly once the dust of the ‘Brexit’ vote has settled . Should bond yields stay under downside pressure the consensus will adapt to our view suggesting that demand and supply of capital is undergoing significant shifts which will keep bond yields offered. Demand for capital will decline as overcapacity has reduced the need for capital intensive fixed asset investments. Supply of capital will increase as high global debt levels combined with lower returns of investments will lead to savings, increasing balance sheet consolidation. Savings will increase at the expense of consumption in regions where the debt overhang is most significant and return of assets the lowest. We think that AxJ will make significant contributions to global savings, first depressing local AxJ sovereign yields and secondly pushing its currencies lower. Lower global bond yields trading near zero yield may lead to a significant change in how currencies are going to trade. The past was all about nominal yield differentials. The future will be about real rates and yields which could push currencies despite otherwise weak fundamentals higher with falling inflation expectations becoming the main reason for higher real rates.
