With the global stock of negatively-yielding bonds reaching $US17 billion ($25 billion) last month (in real terms, after inflation, the volume of bonds with negative yields is probably more than twice that amount) and long-term interest rates at unprecedented lows, it probably isn’t surprising that businesses are wary. Loading Earlier this year the German government issued 30-year bonds with a yield of minus 0.1 per cent. In the US the 10-year bond rate is about 1.8 per cent and in Australia it’s 1.15 per cent and the 15-year rate 1.35 per cent. That sends a signal to businesses that central bankers and bond investors believe conditions are going to remain very subdued, at best, for a very long time. It also messes up their arithmetic. Businesses assess investments by discounting the projected cash flows of a potential investment to produce a net present value that they can then compare with their cost of capital to determine whether there is a positive real return.

The discount rate they use is based on a risk-free rate – a long-term bond rate – and includes a premium for perceived risk. If the risk-free rate is nearing zero in an environment of heightened uncertainty the calculation becomes practically meaningless. It isn’t surprising, therefore, that rather than taking advantage of the ultra-low cost of debt to borrow to invest, a lot of companies, particularly US companies, have borrowed to buy back their shares rather than invest in future growth. That makes sense when the cost of equity has been pushed ever-higher by the search for yield that investors have been coerced into by the low rates on lower-risk investments such as bonds. The risk-aversion of companies and the growth in share buybacks and the higher dividend payout ratios of recent years are contributing factors to the "de-equitisation’’ of sharemarkets. According to the World Bank, the number of listed companies globally shrank by about 4 per cent between 2008 and 2018. Last month law firm Minter Ellison said this year will be the first in which the ASX has experienced de-equitisation, with the amount of equity issued less than the amount being "retired".

Apart from massive levels of capital management - BHP alone has returned more than $40 billion to shareholders through buybacks and dividends in the past three years - there has been a wave of takeovers of listed companies, in this market and abroad, by private equity firms that can use the low-rate environment to leverage their targets to levels that wouldn’t be accepted in public markets. Loading So, the incentive for listed companies in an environment where debt is cheap and equity is expensive is to borrow to buy back the equity while for private equity it is to borrow to buy the companies. In Europe and the US there is another factor in de-equitisation that isn’t a material issue in Australia. In those jurisdictions their pension funds tend to be defined benefit funds rather than the defined contribution funds that dominate here.

In a low-rate environment the earnings of those funds, which largely invest in long-term safe assets such as bonds, don’t grow much. Conversely, their liabilities – the future benefits they will have to fund – rise when they are discounted back into today’s dollars because the discount rates have fallen. To the extent that companies with defined benefit funds have spare cash, or can borrow cheaply, the obvious use of those funds is to reduce their swelling unfunded liabilities rather than invest in their operations. It is arguable that the unintended consequences of the low rates and unconventional policies central banks have adopted since the global financial crisis have contributed and entrenched the low-growth environment experienced since 2008. The unusual monetary policy settings and the signals they have sent have encouraged equity investors to accept more risk while making businesses and households anxious and more risk-averse. While we’ll never know whether economies would be in worse shape if central banks hadn’t persisted with the abnormal settings well past the crisis, it is self-evident that the policies haven’t resulted in a return to more normal levels of growth and more conventional investment patterns.