正文
Anatole Kaletsky
Probably the single most important number inthe global economy is the long-term rate of interest established by theso-called “benchmark” yield on the ten-year US government bond. Thisnumber, which shot up from 4.7 per cent three weeks ago to 5.3 per centlast Tuesday, largely determines the level of long-term interest ratesin every other country.
It thereby exerts a powerful influenceon stock markets, property prices and business investment andultimately sets the course for economic activity and monetary policyaround the world.
Against this background, the biggest questiontoday for businesses, economic policymakers and investors, as notedlast week in this column by Gary Duncan, is whether the sudden sell-offin the US bond market, which triggered the worldwide increase inlong-term interest rates this month, is just a temporary aberration orthe beginning of a sustained breakout to new highs, marking the end ofthe so-called “conundrum” of exceptionally low long-term interest ratesaround the world.
In my view, the answer is an Augustinian“yes”, but perhaps not quite yet. The market’s big fears at the momentare about an unwinding of the structural conditions that have keptglobal bond yields so low. But what exactly does this mean? In the pastfew years, the upward pressure on interest rates normally exerted byrapid economic growth and central bank tightening has been counteractedby four structural factors:
— Regulatory and accounting pressureon pension funds, strongest in Britain but also evident in the UnitedStates and Canada, to shift their investment portfolios from equitiesinto bonds, as a result of which pension funds have stopped acting asnormal profit-maximising investors and become forced buyers, willing tomop up unlimited amounts of government borrowing, at almost any price.
—A desperate search for higher returns by retiring Japanese savers, whohave been receiving zero interest rates on their bank accounts and notmuch more on their pension and life funds, which between themconstitute the biggest pool of savings in the world.
— Currencymanipulation by Asian central banks. which has led to more than $2trillion of reserve accumulation by China, Japan and neighbouringcountries.
— The vast shift of global income, caused by thedoubling of oil prices, from American households, which tend to keepmost of their savings in equities, to Sovereign Wealth Funds in theMiddle East and beyond – including institutions such as the Norway oilfund and the Russian stabilisation fund – whose mandates require themto invest overwhelmingly in government bonds.
Between them,these four distortions in global capital markets largely explained, atleast in my view, the conundrum of astonishingly low real yields. Butwhat is the evidence that these distortions are coming to an end?
Thepressure on pension funds to abandon profit-maximising investmentmanagement is still growing. If anything, the stampede into bonds willbe intensified by the latest increase in interest rates, which,combined with the rise in global stock markets, has returned manypension funds to technical solvency. Many corporate managements willwant to lock in this position by investing their entire pension fundsin the bond market and getting out of the investment managementbusiness once and for all.
Japan shows no sign of moving fromits policy of ultra-low interest rates, suggesting that Japaneseprivate savers will continue to pour their money into global bonds.
Theother two structural influences may, however, be changed. China andother Asian countries still accumulate reserves and try to maintainundervalued exchange rates, but their enthusiasm for this policy may berunning out, partly because of US pressure, but mostly because thecosts of currency manipulation are starting to emerge in their domesticfood inflation and financial bubbles. If China were to decide to freeits exchange rate, global financial conditions would certainly betransformed, but any such move still seems many months, if not yearsaway. The same is true of the final structural influence on long-terminterest rates – the insatiable appetite of Sovereign Wealth Funds forUS and European government bonds. Several of these institutions,representing the governments of Norway, Russia, China and several Araboil states, have recently announced changes in their policies, implyingmore investment in equities, property and other real assets and smallerpurchases of bonds. But this shift, like the one in Chinese currencypolicy, is likely to be a very slow one and has hardly yet begun.
Why,then, have markets suddenly become so focused on these long-termchanges in the past month? The most plausible answer is simply a changein the cyclical outlook for the US economy. In the past few weeks,investors have finally woken up to the argument that this column hasbeen presenting since this time last year: that the present US economicslowdown is not a prelude to recession and, therefore, that the FederalReserve Board is very unlikely to slash short-term interest rates inthe way that bond markets were expecting even a few weeks ago. It isthis shift in investor perceptions, driven by stronger-than-expected USeconomic figures, that seems to account for the sudden change insentiment. This new perception of a healthy US economic rebound will,almost certainly, be proved right. Having said that, however, Americais very unlikely to jump straight from the present slowdown into aperiod of strong growth.
In the next few months, we are bound tosee some weak US statistics and maybe even a revival of recessionfears. As a result, speculation about a small cut in US interest rateswill probably soon revive in global financial markets. If and when thishappens, bond investors everywhere will enjoy at least one moretemporary reprieve. Times (of London)
Probably the single most important number inthe global economy is the long-term rate of interest established by theso-called “benchmark” yield on the ten-year US government bond. Thisnumber, which shot up from 4.7 per cent three weeks ago to 5.3 per centlast Tuesday, largely determines the level of long-term interest ratesin every other country.
It thereby exerts a powerful influenceon stock markets, property prices and business investment andultimately sets the course for economic activity and monetary policyaround the world.
Against this background, the biggest questiontoday for businesses, economic policymakers and investors, as notedlast week in this column by Gary Duncan, is whether the sudden sell-offin the US bond market, which triggered the worldwide increase inlong-term interest rates this month, is just a temporary aberration orthe beginning of a sustained breakout to new highs, marking the end ofthe so-called “conundrum” of exceptionally low long-term interest ratesaround the world.
In my view, the answer is an Augustinian“yes”, but perhaps not quite yet. The market’s big fears at the momentare about an unwinding of the structural conditions that have keptglobal bond yields so low. But what exactly does this mean? In the pastfew years, the upward pressure on interest rates normally exerted byrapid economic growth and central bank tightening has been counteractedby four structural factors:
— Regulatory and accounting pressureon pension funds, strongest in Britain but also evident in the UnitedStates and Canada, to shift their investment portfolios from equitiesinto bonds, as a result of which pension funds have stopped acting asnormal profit-maximising investors and become forced buyers, willing tomop up unlimited amounts of government borrowing, at almost any price.
—A desperate search for higher returns by retiring Japanese savers, whohave been receiving zero interest rates on their bank accounts and notmuch more on their pension and life funds, which between themconstitute the biggest pool of savings in the world.
— Currencymanipulation by Asian central banks. which has led to more than $2trillion of reserve accumulation by China, Japan and neighbouringcountries.
— The vast shift of global income, caused by thedoubling of oil prices, from American households, which tend to keepmost of their savings in equities, to Sovereign Wealth Funds in theMiddle East and beyond – including institutions such as the Norway oilfund and the Russian stabilisation fund – whose mandates require themto invest overwhelmingly in government bonds.
Between them,these four distortions in global capital markets largely explained, atleast in my view, the conundrum of astonishingly low real yields. Butwhat is the evidence that these distortions are coming to an end?
Thepressure on pension funds to abandon profit-maximising investmentmanagement is still growing. If anything, the stampede into bonds willbe intensified by the latest increase in interest rates, which,combined with the rise in global stock markets, has returned manypension funds to technical solvency. Many corporate managements willwant to lock in this position by investing their entire pension fundsin the bond market and getting out of the investment managementbusiness once and for all.
Japan shows no sign of moving fromits policy of ultra-low interest rates, suggesting that Japaneseprivate savers will continue to pour their money into global bonds.
Theother two structural influences may, however, be changed. China andother Asian countries still accumulate reserves and try to maintainundervalued exchange rates, but their enthusiasm for this policy may berunning out, partly because of US pressure, but mostly because thecosts of currency manipulation are starting to emerge in their domesticfood inflation and financial bubbles. If China were to decide to freeits exchange rate, global financial conditions would certainly betransformed, but any such move still seems many months, if not yearsaway. The same is true of the final structural influence on long-terminterest rates – the insatiable appetite of Sovereign Wealth Funds forUS and European government bonds. Several of these institutions,representing the governments of Norway, Russia, China and several Araboil states, have recently announced changes in their policies, implyingmore investment in equities, property and other real assets and smallerpurchases of bonds. But this shift, like the one in Chinese currencypolicy, is likely to be a very slow one and has hardly yet begun.
Why,then, have markets suddenly become so focused on these long-termchanges in the past month? The most plausible answer is simply a changein the cyclical outlook for the US economy. In the past few weeks,investors have finally woken up to the argument that this column hasbeen presenting since this time last year: that the present US economicslowdown is not a prelude to recession and, therefore, that the FederalReserve Board is very unlikely to slash short-term interest rates inthe way that bond markets were expecting even a few weeks ago. It isthis shift in investor perceptions, driven by stronger-than-expected USeconomic figures, that seems to account for the sudden change insentiment. This new perception of a healthy US economic rebound will,almost certainly, be proved right. Having said that, however, Americais very unlikely to jump straight from the present slowdown into aperiod of strong growth.
In the next few months, we are bound tosee some weak US statistics and maybe even a revival of recessionfears. As a result, speculation about a small cut in US interest rateswill probably soon revive in global financial markets. If and when thishappens, bond investors everywhere will enjoy at least one moretemporary reprieve. Times (of London)
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