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Long-Term Global Interest Rates in Sync Thanks to Low Inflation, Slow Growth

December 6, 2014 in Economics

By Alan Reynolds


Alan Reynolds

Why are long-term interest rates so low and so similar in so many countries?

Recent yields on 10-year government bonds, according to the Economist, were 2.24% in the U.S., 2.16% in Italy, 2.19% in Britain, 2.28% in Singapore, 2.15% in Israel, 1.98% in Spain, 2.03% in Norway and 1.94% in Canada.

Bond yields are not just remarkably similar, but also move up and down together with the synchronization of the Radio City Rockettes.

The graph with this piece shows quarterly yields on 10-year government bonds for five very different countries — each with its own currency. Exchange rates float between these currencies, yet their bonds move as if they were tied together.

Global synchronization of bond yields encompasses all countries with strong currencies, low inflation and little risk of default. This is mainly due to arbitrage — a fancy word for incentives to buy low and sell high.

The fact that long-term interest rates move up and down together cannot possibly be caused by policies or economic news unique to each country. These coordinated gyrations of global bond yields are unrelated to the U.S. fed funds rate, for example, which has remained unchanged since December 2008.

In the recent past, most U.S. and British economic reporters uncritically attributed low yields to “quantitative easing” (QE) in those countries.

But that story never fit the facts.

For one thing, U.S. and British yields were commonly higher than those of other countries that shunned quantitative easing. And U.S. yields have fallen further than British yields, while the U.S. ended QE and the U.K. did not.

Another problem with attributing global bond yields to national monetary experiments is that the timing is all wrong. In fact, U.S. yields rose whenever QE was expanded and fell when it stopped.

The yield on 10-year Treasuries dropped from 3.85% to 2.54% between April 2010 and October 2010, when the first phase of QE had ended, and then began rising again only after Nov. 3, when the Fed announced a QE program buying $600 billion of Treasuries.

The last QE program began September 13, 2012, with $40 billion monthly purchases of mortgage-backed securities plus an extra $45 billion in monthly purchases of Treasuries after Dec. 12, 2012.

The 10-year yield was 1.6% in the three months before QE began, and then climbed steadily to 2.9% by December 2013 before falling steadily as the QE program was phased out from January to October.

Quantitative easing can’t explain why so many …read more

Source: OP-EDS

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