The next bubble in the financial markets is now being inflated by the extraordinarily low yields on Government debt, according to Schroders’ group chief investment officer Alan Brown.Large holders of sovereign debt, such as Bermuda insurance companies, could see their balance sheets take a hit if interest rates rise to more historically normal levels in the coming years, since higher yields mean lower bond prices.Mr Brown, who was in Bermuda yesterday, said the wide array of potential outcomes in the Greek debt crisis, and several other situations that could have major repercussions for the global economy, made this a very challenging time for investors.Schroders manages around $323 billion of mainly institutional investors’ funds and, as group CIO, Mr Brown plays a leading role in where to put that capital to work.“The next bubble is fully inflated,” Mr Brown said. “What I’m thinking about is the extremely low yield from Government debt. For example, a 10-year US Treasury bond yielding in the region of 2.95 percent is low by any historical perspective.“It shows what investors will pay for certainty of return. What I’ve seen is a huge swing in relative value away from Government debt to equities. But that is not reflected in the asset allocations of the sections of the market that hold large amounts of debt for example, insurance companies.”The dividend paid on shares of UK retail giant Marks & Spencer was higher than the yield on a 10-year UK gilt. This was a rare situation, Mr Brown suggested.He quoted Grant’s Interest Rate Observer as noting that Treasury bonds had gone from being “a source of risk-free returns to return-free risk”.A return to “business as usual” within the next few years could see interest rates climb up to four to five percent, with sovereign debt yields also climbing higher. Since bond prices and yields move in opposite directions, this scenario sets up sovereign debt holders for a fall.And if central banks like the US Federal Reserve get their timing even slightly wrong in applying the brakes to the economy which has been pumped with cheap money for a significant period of time, the rise in interest rates would be sharper and the consequences even more dire for holders of government bonds, he added.Mr Brown said the wide range of possible outcomes of several situations that could have global economic impact were making this a difficult time for asset managers.“This is my 38th year in this business and this is certainly one of the most difficult times for investing,” Mr Brown said in an interview.“Most people are talking about some kind of debt restructuring for Greece, but no one knows what the result of that will be.“And then there’s the Arab spring. People are assuming it will not spread to Saudi Arabia, but what if it did? Most people would hope the vacuum would be filled by reasonable entities and not Iranian-style religious fundamentalists. You have to acknowledge that this is a possible outcome.“In fact the range of possible outcomes is so extraordinary that you can’t, in all honesty, speak with any confidence about what the outcome will be.”The unusually wide distribution of potential outcomes, which implies heightened investment risk, puts a premium on diversification and requires asset managers to be much more responsive to unfolding events that could alter the plausibility of various outcomes, Mr Brown said.The lingering Greek debt crisis is a particular concern for investors and Mr Brown said that the possibility of Greece leaving the euro or defaulting on their debt would probably not have the apocalyptic consequences that politicians were implying.“Between the end of the Second World War and 2005, 69 currency unions have come to an end,” Mr Brown said. “Currency unions are political structures and so the political rhetoric is that the world ends if they come to an end.”History told a different story, however. After Britain pulled out of the European Exchange Rate Mechanism in the 1980s, the immediate upheaval was followed by 15 years of high growth and low inflation, Mr Brown said. And Asia recovered strongly after its regional financial crisis in the 1990s.Greece coming out of the euro would allow its exchange rate to fluctuate in tune with the national economy. Currency depreciation would make Greece more internationally competitive and allow better prospects for its economic recovery, he said.One of the possibilities he could see happening was a two-currency union, featuring a northern euro and a southern euro.A restructuring of some sort for Greece’s debt was “a racing certainty” he said.