Have analysts got it wrong on the risk free rate

Have analysts got it wrong on the risk free rate? Over the past decade, analysts have systematically overestimated bond yields (the risk free rate). They have assumed a reversion to long term bond yield averages that has never occurred... Nonetheless, what we are generally finding in the Australian market is that analysts are still making their own upward adjustment to the risk free rate. The risk free rate being used in the Australian market place ranges from 4.5% to 6%, well above current spot bond rates of 2.7%. To put these rates in context the average of the past 10 years is 5.0%, and the average of the past 20 years is 5.7%. The average analyst is currently using a risk free rate of 5.0% to 5.5% in their valuations. We expect that over the coming 12 months, analysts will begin to reduce the risk free rate they are using in their long term valuations, which will see valuations rise. This is not simply an academic debate. The latest newsletter from Freehold Investment Management discusses this theme further: (VIEW LINK)


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