Global interest rates continue to plunge, which reflects a growing pessimism about global growth prospects, particularly in the developed world. This international trend is pulling U.S. rates down as well – a dynamic we expect to continue in addition to domestic factors holding U.S. interest rates near historic lows.
The second quarter saw the trend of lower global rates accelerate. Data from the major EU countries, particularly Germany, has disappointed, and uncertainty around trade tensions has adversely impacted business sentiment. The European Central Bank (ECB) has begun discussing additional stimulus, and markets are now pricing in over 80% probability of an ECB rate cut by year-end. This sent the German 10-year government yield plunging to -33 bps toward the end of June, an all-time low. This decline is noteworthy, given that the average German 10-year yield was 1.63% during the EU’s recession of 2011–2013.
Financial markets have long gotten used to Japanese markets with negative policy rates and long-term rates close to zero. But the specter of negative interest rates is spreading, adding to the global sense of pessimism that monetary policy is out of ammunition to stimulate growth. At present, debt with negative interest rates exceeds $13 trillion.
In the global financial system, international policy expectations and interest rates have an increasingly large impact on U.S. rates. The low global interest rates environment puts downward pressure on U.S. benchmark rates. Even a fleeting rise in U.S. rates – for example, from a piece of surprisingly strong data – can be viewed as a buying opportunity for foreign investors eager to find yield, resulting in a correction back to lower levels.
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