Why the U.S. rates surge went worldwide
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Illustration: Aïda Amer/Axios
The rapid rise in long-term interest rates has mostly been a story about the United States, what it means for the domestic economy, deficits and more. But the narrative has gone global.
Why it matters: The higher-rates-for-longer phenomenon looks to be rooted in changes to the U.S. outlook but is sending ripples across major economies, resulting in higher borrowing costs for companies, individuals and governments around the globe.
By the numbers: Since the end of June, the 10-year U.S. Treasury bond yield is up 1.07 percentage points. Moves in other major global bond markets are smaller, but still substantial.
- Ten-year Canadian yields are up 0.76 percentage points. In Japan, the move is half a percentage point. In Germany, it's 0.43.
State of play: Treasury Secretary Janet Yellen noted the rise in global rates last week, citing it as a reason to believe that high U.S. budget deficits are not a primary driver of the rates spike.
- "We're seeing yields go up in most advanced countries," Yellen said Thursday, attributing it to "the resilience people are seeing in the economy."
Yes, but: It's not so straightforward. Treasuries are core to the global financial system. Shifts in yields have powerful spillover effects globally, and that looks to be what has been happening over the last few months.
- That's true regardless of whether you believe higher U.S. yields are driven mainly by growth expectations, the fiscal outlook or something else.
How it works: The market for capital is global. If you're a sovereign wealth fund or pension manager or other investor, you are looking for the best return.
- So for example, when the Canadian finance ministry goes to auction its bonds, it can't get the same low rates it did in June because global investors wouldn't buy at those rates, with Treasuries yielding much more.
- Higher Treasury yields, even if driven entirely by domestic factors, exert an upward tug on yields worldwide.
Meanwhile, to the degree investors now anticipate a tighter-for-longer Federal Reserve policy, it increases the odds that other major central banks will do the same.
- That's because central bankers closely monitor what their counterparts are doing, with the knowledge that sharp policy divergences can create unwelcome currency swings and capital flows.
- Evercore ISI, for example, attributes 60% of the increase in Japanese yields since the summer to spillovers from the U.S., driven by stronger growth and changing expectations of U.S. monetary policy.
The bottom line: Change in sentiment about the U.S. economy, debt outlook and monetary policy ripples through bond markets worldwide — right now driving global rates upward.
