Interest Rates Trending Flat to Down Among the G-10

While a lot has been made of the RBA raising Australia’s short term rates over the last week, the fact is that most of the world is not doing quite as well. Whereas Australia actually has some inflation, the United States, Japan, and Europe are still not growing and rates are likely to stay around their current levels for at least a few more quarters.

Australia on the other hand was able to avoid a large part of the current global recession by supplying Asia, namely China, with commodities. As you can see in the chart below (click to enlarge) the short term rates have climbed but in spite of this the long term rates are still basically unchanged.

Australia Interest Rates

Looking at the G-10 as a group we can see that rates are low and aside from Australia and New Zealand rates are essentially unchanged for the past six months as central banks continue to fight deflation and disinflation (click on chart to enlarge). The trend is flat and likely to stay that way.

G-10 Short Term Interest Rates

With the current rally and all the talk of inflation, you would expect that long term rates would be climbing but instead they are flat to trending lower in every single G-10 country. Treasury bonds might be in the bubble of a lifetime but we are not seeing that yet with lower rates and extremely slow global growth, especially in the developed world (click on chart to enlarge).

G-10 10-Year Interest Rates

If you want to see a cleaner chart with the average G-10 long and short term rate you can look at the chart below (click to enlarge) where we have taken a simple average of G-10 long and short term interest rates. As you can see everything has remained the same for a few months now.

G-10 Interest Rates

Finally, lets look at the whole investable world. As you can see in the chart below (click to enlarge) the Global GDP weighted yield curve has been flat since May 2009 with very little change. If inflation is hitting the world right now then it would appear as though bond investors are clueless.

In our experience bond investors are rarely clueless and we are inclined to bet with them. Right now we are looking at potentially re-entering our long bond trade as investors come to the realization that we, along with investors such as PIMPCO (maybe its PIMCO but the way that Bill Gross ran the Fed last winter we can’t help ourselves), see slow to negative global growth over the next year and probably for the next few years as the world's financial system rebuilds, assuming we get that far.

Global GDP Weighted Yield Curve

Disclaimer: We are long some GLD, DBV, and HYG

Comments

[Trader BOB:]

Do any of you traders have any experience with HYG? What do you know about the issuing company? Information about the vendor is scarce.
This is an interesting ETF because it pays a monthly dividend and has an $8+/share dividend.

Oct 16 09:12 AM