14 trillion of sovereign paper had negative yields. for the past decade, the yield structure in the us has been lower than at any time previously. let me put in context the current excitement about the 10 - year yield in the us reaching 3 per cent. in the three decades prior to 2007, the low point for the yield was 3. 11 per cent. all this goes to say that we have been living in a period of unusually low nominal bond yields. how long will this period last? one way to think about this question is to ask whether what we are seeing is the realisation of a tail event in the historical distribution of interest rates. 1 while this tail event has now lasted quite a long time, if you thought it was a tail event, then you would expect yields to revert back to their historical mean at some point. you also wouldn ’ t change your assessment of the distribution of future realisation of interest rates. on the other hand, it might be the case that the yield structure has shifted to a permanently lower level because of ( say ) secular stagnation resulting in structurally lower growth rates for the major economies for the foreseeable future. if this were the case, you would change your assessment of future interest rate outcomes. i don ’ t know the answer to this question, but it has material implications for asset pricing. 2 / 14 bis central bankers'speeches as i said earlier, the prices of many assets could be broadly validated if you believe the low rate structure is here to stay. 2 this is because the lower rate structure means that the rate with which you discount expected future returns on your asset is lower and hence the asset price is higher for any given flow of future earnings. the current constellation of asset prices seems to be based on the view that the global economy can grow strongly, with associated earnings growth, but that strong growth will not lead to any material increase in inflationary pressure. 3 you might want to question how long such a benign conjuncture could last. current asset pricing suggests that the ( average ) expectation of market participants is that it will last for quite a while yet. it is also worth pointing out that it is possible that a move higher in interest rates occurs alongside higher expected ( nominal ) dividends because of even higher real growth. if this were to occur it would not necessarily imply that asset prices have to adjust. it would depend upon the relative movements in earnings expectations and interest rates ; that is, the numerator

have been factors behind the low structure of interest rates which are difficult to understand completely and raise questions about its durability. i have discussed some of them here today. in particular, i find it puzzling that there is little compensation for duration in the rate structure. while there are explanations for why interest rates may remain low for a considerable period of time, there is minimal compensation for the uncertainty as to whether or not this will actually occur. at the same time, equity prices embody a view of the future that robust growth can continue without generating a material increase in inflation. again, there is little priced in for the risk that this may not turn out to be true. the ongoing improvement in the global economy, together with the fiscal stimulus in the us has caused some investors to question these views. if interest rates continue to rise without a similar rise in expectations about future earnings growth, one would expect to see a repricing of other assets, particularly equity markets. such a repricing does not necessarily mean a major derailing of the global recovery, indeed it is a consequence of the recovery, but it may have a dampening effect. at the same time, we need to be alert for the effect the rise in the interest rate structure has on financial market functioning. the recent spike in volatility is one example of this. in my view, that was a small example of what could happen following a larger and more sustained shift upwards in the rate structure. the recent episode was primarily confined to the retail market. the large institutional positions that are predicated on a continuation of the low volatility regime remain in place. that said, i have expected that volatility would move higher structurally in the past and this has turned out to be wrong. but i think there is a higher probability of being proven correct this time. 1 see kozlowski j, l veldkamp, v venkateswaran ( 2018 ), ‘ the tail that keeps the riskless rate low ’, available at, nber working paper no. 24362. 2 one may also want to think about the relatively low level of spreads in a number of fixed income markets, as my colleague christopher kent talked about earlier this week. in some markets ( but not all ), these spreads are close to pre - financial crisis levels. see kent c ( 2018 ), ‘ australian fixed income securities in a low rate world ’, address to the debt capital markets summit, sydney