E 10-Year Yields And Implications

Interest rates have been unusually stable since 2009. Some important global interest rate trends have emerged during the pandemic. Inflation expectations still remain a key determinant of bond yields.

The pandemic recession and the measures taken to spur economic recovery from the pandemic have resulted in some clear country differences in terms of short-term interest rates and bond yields. 

Indeed, there have been three important interest rate developments associated with the pandemic recession that has shaped global interest rates as well as inflation expectations. Nonetheless, in all three cases, the interest rate patterns that are focused on here actually emerged before the pandemic. 

The three important financial developments are (1) close to zero and in some cases negative central bank policy interest rates; (2) the fact that in the advanced economies the policy framework has deliberately supported extremely low and in some cases negative bond yields (e.g., ten-year yields), and finally; (3) an increase of the spread between higher bond yields of the emerging market countries compared to the advanced economies.

In the latter case, the large interest rate spreads clearly reflect the substantial differences in the inflation rates between the advanced and the emerging market economies. 

Central banks turned to zero interest rates to protect their economies from the Great Recession in 2008-09. Ever since then, with some exceptions, we have been experiencing unusually stable and relatively low interest rates right across the yield curve. 

Indeed, to save most of the developed world from a worsening economic downturn, since 2009 massive government deficits, close to zero central bank policy rates and extremely low bond yields have become almost the norm. 

Even though short-term interest rates among the wealthy G7 countries are still quite close to zero, the comparable rates in the large emerging market countries are considerably higher. As an aside, in recent years, several European and Asian central banks have imposed negative interest rates on commercial banks which have also resulted in negative ten-year bond yields. 

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Norman Mogil 4 weeks ago Contributor's comment


If long rates were to move up 200bps the impact would be very damaging. Since the investment grade corporate bond spreads are very narrow--approx. 150 pbs, that market would be severely impacted and this would lead to a dramatic sell off in the equity markets. The equity, corporate and govt bond markets are vey intricately tied.  A 200pbs move on the 10 yr would mean that 10 yr interest costs more than double and would be very bad for housing and all sectors relying on capital investment. It would kill any nascent recovery.

The Fed will not allow this to happen. It will, as Japan does, introduce yield curve control (YCC) and bring down long rate through selective bond buying. We have had negative real yields for more than a decade and too much of the economy relies on that being maintained. I would not go short on the bonds for this reason.