And that brings us to a big question why are bond yields so low and why has this phenomenon been going on for the last several years?

It is a puzzle we have been trying to solve for some time but the more we learn, the less we understand

The orthodox view is that it is a rational response to the economic conditions

The argument goes that the economy is still fragile, unemployment is high and inflation is low, so people are not demanding much of a return on their investments

But we have been here before

In 1999, the world was in the midst of a technology bubble, the Nasdaq index was hitting record highs and Australia was in the midst of a construction boom with house prices rising by more than 15 per cent year-on-year in some markets

Yet the bond market wasn't behaving like this

Ten-year bond yields were 4 5 per cent

Low bond rates happen every decade as a result of central banks buying bonds

The first time was in the late 1940s, when 10-year yields dropped to about 3 per cent

The next time was in the mid-1960s, when they dropped to about 3

And the last time was in the late 1990s

This time around, the drop looks more extreme than the last two episodes, but the one in the 1960s is the most interesting

It is worth noting that the RBA wasn't targeting inflation so those yields are not comparable to today's

But the point is that the bond market is not just responding to Fed policy

It is responding to something else

We have a hypothesis about this

We think the current low-yield environment is the result of three things

A credit boom

A housing boom

And a mining boom

In other words, the credit, housing and mining booms are creating the demand for bonds that is keeping yields low

Let's take these one at a time

The credit boom

This is a good measure of the credit boom because it is mostly used by companies to fund investment