Submitted by Taps Coogan on the 9th of March 2018 to The Sounding Line.

The following chart shows the yield (at time of writing) on the sovereign 10-Year bond for 65 of the largest economies around the world. Yields range from a high of 15.512% in Uganda to a low of 0.055% in Japan. The United States 10-Year Treasury bond, the global ‘risk-free’ benchmark, is smack-dab in the middle of the pack, lower than 32 countries and higher than 32 countries. It has a yield of 2.872%. Countries that currently have lower borrowing costs than the US include many who have higher debt levels, worse fiscal track records, and/or elevated geopolitical risks: Thailand, Italy, Spain, Bulgaria, Lithuania, Taiwan, and Japan. Such is the power of extremely accommodative monetary policy.

As the US Federal Reserve continues to reduce its balance sheet and raise interest rates, the divide between US monetary policy and other major central banks is growing. We have discussed the prospect of rising interest rates in the US on several occasions. Such a rise could continue to hollow out investor demand for artificially low yielding bonds outside the US, forcing foreign central banks to accelerate their accommodative policies or face the threat of rising borrowing costs. For many, rising borrowing costs will not be an option. Low rates are key to the feeble economic recoveries in Europe and Japan and a lifeline to so called ‘zombie’ companies around the world (unprofitable companies surviving off of access to cheap debt). As we discussed here, several countries are already spending over 20% of tax revenues servicing their national debts, despite record low interest rates. Even a slight rise in rates could prove disastrous for governments and companies around the world. One can imagine that central banks outside of the US will therefore not permit their rates to rise significantly. That will require ever more accommodative policy, which will make US rates and monetary policy all the more attractive. Thus the growing imbalance between higher rates in the US and stagnant low rates outside of the US, may drive a feedback loop that leads to more accommodative policy in Europe, Japan, and elsewhere, and investor capital flight to the US.

P.S. We have added email distribution for The Sounding Line. If you would like to be updated via email when we post a new article, please click here. It’s free and we won’t send any promotional materials.