In November 2016, 10-year U.S. interest rates staged the largest monthly uptick since the end of 2009.1 At the same time, the Fed increased its projection for rate hikes in the year ahead.2 However, by virtually any measure, rates are close to historic lows. This isn’t just a U.S. phenomenon-rates across much of the developed world are actually lower than in the U.S.

10-year government bond spreads 2014 2017 Sources: Bloomberg, FS Investments. 10-YEAR GOVERNMENT BOND SPREADS 2.6% 2.4% 2.2% 2.0% 1.8% 1.6% 1.4% 1.2% Japan Germany

We will be watching: In addition to keeping an eye on U.S. rates, we will monitor the difference - or spread - between U.S. and international interest rates. While interest rates around the globe have rebounded since lows reached over the summer of 2016,3 U.S. rates have moved higher relative to other developed nations. However, when the U.S. to international spread increases, it can create an organic correction mechanism. That is, if foreign buyers are attracted by higher U.S. rates, and drive up prices, rates would fall.

Risks to our view: U.S. rates could begin moving significantly higher due to a material or perceived increased risk of owning U.S. government debt. Should fiscal spending bring significantly greater deficit projections, for example, higher U.S. rates may not be as enticing to foreign buyers as a safe-haven investment.

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1 Bloomberg.
2 Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, December 2016.
3 German, French and Japanese yields bottomed in July, while yields in the U.K. bottomed in August, Bloomberg.


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