The landscape in Ireland's financial markets in recent months, indeed years, has been dominated by two broad themes. The first of these has been the implications of the decision by successive Irish governments to join European Monetary Union (EMU) at the commencement of the regime in January, 1999. The other has been the process of "disinflation" that has been evident in all the major economic blocs in recent years.

The combined impact of these trends has resulted in long-term interest rates falling to their lowest level of the post-war era and that, in turn, has had very profound implications for asset values in other markets.

Last week, both the European Commission and the European Monetary Institute (the forerunner of the proposed European Central Bank) declared all 11 aspiring members "fit" to participate in EMU and it now looks overwhelmingly likely that the system will begin on schedule in January of next year.

As expected, Ireland was included in those deemed eligible to join. The strong performance of the Irish economy in recent years resulted in the Maastricht criteria being comfortably fulfilled, even though there has been some concern expressed by our European partners that current trends in the Irish economy may result in an acceleration of inflation over the rest of 1998 and into 1999.

The two main implications of the new regime are that interest rates in Ireland will be identical to the common rate set throughout the euro bloc and that the movements in the pound vis-a-vis sterling and the dollar will exactly mirror the movements of the euro against those currencies.

Some commentators expected that the convergence in interest rates might already have taken place by now but the Central Bank has had other ideas. The bank is clearly concerned about the pace of expansion in consumer spending, house prices and bank lending and is likely to delay the convergence in rates as long as possible. But long-term interest rate markets have already fully taken on board what will happen in 1999 and beyond. The gap between yields on Government bonds in Ireland and Germany has now been almost entirely eliminated.

However, from the point of view of asset prices in other markets, it is not just significant that bond yields in Ireland have converged towards those in other markets, but have converged at levels which are historically low.

Five-year yields on Government bonds are not much more than 4.5 per cent at present and 10-year yields are less than 5 per cent.

These trends, in turn, reflect the impact of "disinflation" in all the major economic blocs. Even in countries such as the US and the UK, where the economies have been growing at above average rates, inflationary pressures have remained exceptionally muted.

So let us be clear about what bond markets are saying right now. They are implying that interest rates in Ireland, and elsewhere in Europe, will remain in low, single digits, not just in 1999 but for the foreseeable future.

That implies that investors will have to contend with lower returns on, and pay higher prices for, other assets.

In the equity market, for example, the price/earnings ratio has risen from 13 to 22 in 15 months. That implies the value of a company which earns after-tax profits of £100 per annum has risen from £1,300 to £2,200 over that period. Such valuations are higher than anything achieved in the Irish equity market in the last 50 years.

Similar trends have been evident in property. Since late 1994, the Jones Lang Wootton yield on offices has fallen from almost 8 per cent to a touch under 6 per cent. However, unlike the bond and the equity markets, property valuations have not yet reached levels which represent historic highs. Yields on office property were lower than they are at present in the late 1980s mini boom and were very much lower in the early part of that decade.

So, it would not be surprising if yields on property were to fall further.

Given the continuing strong growth of the economy, it is likely that rents will grow at a reasonable pace. On that basis, a starting yield of 6 per cent, on a rental base that is likely to expand, looks to offer much more potential than tying up one's money for 10 years in Government bonds at an annual rate of return of less than 5 per cent.

Falling yields and rising rents do, of course, imply that property valuations will rise further over the next couple of years. In recent years, returns from investing in property have been substantial but well behind what has been achieved in the equity market.

In 1997, for example, property appreciated by an average of almost 25 per cent compared with over 50 per cent for equities. Over the previous two years, the total return on property was 34 per cent compared with a return of almost 60 per cent in equities over the same period. And with equities ahead by more than 30 per cent since the turn of the year, it looks likely property returns will fail to match equities again in 1998.

But after that, the continued combination of falling yields and rising rents may shift the balance back to the property. In any event the absolute returns should be sufficient to keep most investors happy.

Robbie Kelleher is head of research at Davy stockbrokers.