Source: (L) Bloomberg. (R) Macrobond.
Global interest rates plunged in Q1 in response to global growth concerns and have pulled U.S. rates down alongside them. We expect this dynamic to continue well into Q2 and add to domestic factors holding U.S. interest rates near historic lows.
Starting late last year, renewed concerns about slowing global growth re-emerged, and policy expectations abruptly shifted. In Europe, the ECB slashed its 2019 GDP forecast to 1.1% from 1.7%. Japan trimmed its growth forecast to 1.3% from 1.5%. And China lowered its 2019 growth target to 6.0%, down from 6.5%.
The rapidly shifting growth outlook stopped central banks in their rate hike tracks. In the U.S., this meant an about-face for the Federal Reserve, where officials quickly pivoted away from further rate hikes toward a more patient “wait and see” posture. In Europe, where policy rates are still negative and the ECB had been signaling its first rate hike since 2011, expectations of a rate hike were suddenly delayed out to next year.
Long-run interest rates followed, with many 10-year government bond rates plunging to levels not seen since 2016. The German 10-year bund yield dipped back into negative territory in March, and the Japanese 10-year government bond fell to -0.09%. The U.S. 10-year government bond has also fallen markedly, down to 2.37% in late March, 86 bps below its peak in November of last year. Looking across the developed markets, remarkably, U.S. benchmark interest rates stand out on the high end, a testament to the fact that lower interest rates are not just a U.S. phenomenon.
We will continue to watch international policy expectations and interest rates. The low global interest rates environment puts downward pressure on U.S. benchmark rates. Even a fleeting rise in U.S. rates – for example, from a piece of surprisingly strong data – can be viewed as a buying opportunity for foreign investors eager to find yield, resulting in a correction back to lower levels.
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