Twice a year we undertake an analysis of real interest rates for our publications Consensus Forecasts – G7 and Western Europe and Asia Pacific Consensus Forecasts (in May and November) and the resulting tables and analysis are displayed in both the hard-copy and PDF versions of the publications. Our analysis focuses on both short-term and long-term interest rate expectations.
|Consensus Forecasts – G7 and Western Europe||Asia Pacific
|United States||Canada||Australia||New Zealand|
The table below shows a portion of the data from one of our surveys for 10-Year Real Interest Rates (from our May 2020 Consensus Forecasts – G7 and Western Europe survey), together with some written analysis from the same publication.
Our regular analysis of real, i.e. inflation-adjusted, interest rates in 12 of the world’s industrialised economies compares the range of current long-term, 10-year government bond yields (see table above) with levels from our survey of six months ago. From a longer-term historical perspective, an economic paper published in 2016 by the US Federal Reserve Bank of Minneapolis, Real Interest Rates over the Long Run, shows that long-term interest rates in the increasingly integrated G-7 capital markets have all been converging toward low or negative levels since the 1980s. The drop in real rates is also related to the low-growth, low-inflation, low-capital-cost, high-liquidity environment which has prevailed since the Global Financial Crisis of 2008-09. Now we have entered a new era with the Great Pandemic. How will 10-year bond yields behave in a likely extended period of economic, social, political and financial upheaval?
Markets are scrutinizing bonds through the prism of sovereign indebtedness, which has spiralled in recent weeks. Stay-at-home orders prompted a major expansion in fiscal spending to mitigate the worst economic impact and help cover some of the financial strain from lost jobs and incomes . However, this might only continue for a finite period of time (as the European 2011 debt crisis showed, the financial markets later rounded on those countries which were thought to have built up unsustainable debt burdens). Central bank expansionary policies may also go some way to soaking up bonds. Bond activity has been busy recently as states issue debt to cover stimulus packages. Nominal US treasury yields jumped on May 6 as investors survey an expanded debt supply (the Treasury Department has increased the size of bond auctions and even introduced a new 20-year maturity). However, given the US’s 10-year inflation forecast (of 1.9%), real long-term interest rates stand at -1.2%. The UK has comparable CPI expectations as the US, but its real bond yield is even lower (-1.7%) while Germany’s is at -2.0%. Italy’s real interest rate is the only one above zero (at +0.6%), the product of relatively high nominal yields (priced-in higher risk).
A portion of text from Consensus Forecasts – G7 and Western Europe, May 11, 2020.