Assessing the fair value of bond yields is a challenge, even more so today in a world of quantitative easing where central banks like the Fed until 2013 or the ECB now buy bonds without any concern about their valuation. Sometimes yields decline so much that it is hard to rationalise their level in a longer term perspective. This is what we have seen in the Eurozone as of late.

The chart shows the evolution of the one year rate in ten years’ time. Recently this dropped below 50 basis points, although it moved back up subsequently. Given the relationship between the one year rate and the ECB refinancing rate this implies that the market was of the view that in 2025 the refi rate would still be close to zero…forward rate 1 year in 10 years