The world's richest nations are borrowing for free.

Taken together, the average 10-year bond yield of the U.S.,Japan, and Germany has dropped below 1 percent for the first timeever, according to Steven Englander, global head of G-10foreign-exchange strategy at Citigroup Inc.

That's not good news. The rock-bottom rates, which fall belowzero when inflation is taken into account, show “that investorsthink we are going nowhere for a long time,” Englander wrote in areport yesterday.

If the global economy was picking up, then bond yields wouldreflect expectations that inflation would accelerate and riskierassets would prove more attractive. Instead, inflation is on theslide. JPMorgan Chase & Co. forecasts a global rate as low as 1percent if oil remains below $60 a barrel.

Even during the Great Depression, governments in the U.S. andabroad paid more than now to borrow for a decade, Englander says.At the end of the crisis-roiled 2008, the so-called Group ofThree's rate was still above 2 percent.

More broadly, bonds in the Bank of America Merrill Lynch GlobalBroad Market Sovereign Plus Index had an effective yield of 1.28percent as of yesterday, the all-time low, based on data startingin 1996.

The former Federal Reserve Bank of New York economist sees twopossible reasons for the free money.

First, it could be secular stagnation, a term popularized byformer U.S. Treasury Secretary Lawrence Summers. He contends thatrich nations are suffering a persistent lack of demand and shouldtake advantage of the low bond yields to boost spending.

Even with the U.S. accelerating, the world economy is not “outof the woods,” Summers told a weekend conference of economists inBoston.

Englander's second theory is that while central bankers havebeen aggressive in cutting interest rates and pursuing quantitativeeasing, investors may be concluding that policy needs to be evenmore innovative if it is to gain traction.

It is “striking that this is not happening during the panicphase of a crisis, but after the panic is over and we have hadsignificant recoveries in asset prices globally,” Englanderwrote.

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