Low rates may also squeeze the profitability of financial intermediaries through narrow interest margins and other factors. In turn, these intermediaries as well as investors that had promised fixed nominal rates of return—such as insurance companies and pension funds—may “reach for yield,” or take on more credit or duration risk in their portfolios in order to maintain high returns.
In addition, with limited private sector securities plying the market, savers do not have sufficient means to migrate themselves into investors, keeping available funding to the shorter-term tenors. Short-tenors are not the natural match for the longer-term funding needs of entrepreneurs and corporate borrowers. Our idea of capital market reform is not a question of the dominance of one product over the other.