In “The Age of Anxiety”, the poet W.H. Auden remarks: “Gradually for each in turn the darkness begins to dissolve and their vision to take shape.”
OVERVIEW AND CONCLUSION
Since summer 2016, using the 10 year central government note as a benchmark, global interest rate yields for leading nations “in general” gradually have risen. The United States has been the key nation propelling “overall” debt yields upward. Also since summer 2016, marketplace trend twists and turns from the price and time perspective for this assortment of nations usually has been fairly close.
Relatively strong American economic growth and tightening Federal Reserve Board policies have played important roles in the worldwide rate increase process. The reduction of central bank yield repression is and will remain a crucial factor underpinning the long run yield increase trend. Even the European Central Bank and Bank of Japan, which have ongoing lax monetary policies, suggest they eventually will become slightly less accommodative.
Significant global credit demand in an environment where overall global debt (government, corporate, household) already is substantial also is an important element tending to boost global yields. The international government debt level as a percentage of GDP nowadays is much greater than at the advent of the 2007-09 global economic disaster. For many countries, including America, there is little likelihood for notable government debt reduction anytime soon.
Expanding United States federal budget deficits resulting from December 2017’s exciting tax “reform” legislation probably have encouraged the ascent in American yields. Given the importance of America in the interconnected global economy, the US national budget deficit and debt level trends as a percentage of GDP not only will continue to generate US Treasury rate climbs over the long run, but also will assist a global upswing in yields. America’s tax reform scheme exacerbated the already massive long run federal budget problem (big deficits alongside entitlement spending, etc.; higher demand for credit). By helping to push American US government interest rates higher, the tax reform magnifies the country’s monumental debt challenge.
Despite the broadly similar rising yield trend direction and convergence links (connections, associations) across the central (federal) government note marketplaces since summer 2016, the pattern of course is not always perfect. Also, as time passes, divergence within this “overall upward trend” may emerge. For example, whereas the US Treasury 10 year note’s yield high to date since summer 2016 is 10/9/18’s 3.26 percent, the German Bund (81 percent on 2/8/18) and China’s 10 year central government note (11/22/17’s 4.04pc) attained their highs many months earlier. In addition, rate climbs are not all necessarily the same in distance or speed terms. For countries engaged in substantial yield repression, the advance may be fairly small and slow for quite a while.
Fearful “flights to quality” occasionally may inspire yield falls in so-called safe haven government debt instruments issued by nations such as America, Germany, and Japan. Central banks likely will become (or remain) highly accommodative if the global recovery appears seriously threatened. The reality of or omens pointing to feebler than expected (desired) GDP growth (in conjunction with other variables) may spark such yield declines, and perhaps also induce renewed accommodative central bank actions (or at least soothing rhetoric from such earnest guardians).
In the current marketplace situation, additional notable erosion in the prices of global stock marketplace benchmarks from their calendar 2018 summits might also inspire relatively significant retreats in debt yields. For example, a decline in the S+P 500 of nearly twenty percent or more from its autumn 2018 peak could connect with government yield declines (and perhaps with the emergence of central bank propaganda or action to rally stock prices).
The major (long run) trend for US government interest rate yields, and for other nations around the globe, probably remains up. Despite tumultuous twists and turns, the long run upward march in government interest rate yields which commenced around the middle of 2016 likely will remain intact. The UST 10 year note’s 3.26 percent high yield will be exceeded.
However, the declines in global stock marketplaces (especially the S+P 500’s slump since its September 2018/October 2018 peak), especially if interpreted alongside the failure of German and Chinese 10 year government notes to establish yield new yield highs close in time to those in the UST (and other important countries), warn that a temporary halt to (or noteworthy slowdown in) the overall global pattern of rising government rates (including in America) is being established. Some yield declines in government notes may be rather dramatic. However, based upon a perspective of a long run extending for several years from now, such yield descents probably will be temporary.
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Twists, Turns, and Turmoil- US and Other Government Note Trends (11-12-18)