10-yr sovereign yields in Germany have plunged to just under 1%, and Japanese yields are a mere 0.5%. U.S. 10-yr yields seem to be following suit, dropping from 3.0% at the end of last year to 2.34% today. Is the U.S. going the way of Japan? Are the industrialized economies doomed to very slow growth for the foreseeable future? The following graphs say no.
The above graph shows the evidence that's grabbed the market's attention of late: yields in Germany and the U.S., which tend to move together, appear to be converging with those of Japan.
German sovereign yields are to the Eurozone bond market as U.S. Treasury yields are to the U.S. bond market: the risk-free benchmark. Here we see the huge difference between the strength of the German economy and the Eurozone average. Germany is being dragged down by its weak neighbors, but it is still somewhat ahead of the U.S. economy over the past 17 years. But it's also clear that the Eurozone as a whole is just treading water, much like the Japanese economy until a few years ago, and that provides some justification for the very low Germany bond yields. But the U.S. economy has been far stronger, and continues to be, so there is little or no reason to think the U.S. yields have to converge with German yields.
July manufacturing production in the U.S. rose at a strong, 8.2% annualized pace in the past six months, and has now reached a new, all-time high. After the devastating recession of 2008-2009, manufacturing production has risen by more than 25%. It's a shame it's taken this long to recover to former highs, but the growth and improvement is nonetheless impressive.
July producer price inflation is up at a solid 2-3% pace, as the graph above shows.
There is no sign in these graphs that the U.S. is in danger of getting sucked into a Japan-style deflation and/or stagnation. If anything stands out here, it's the relatively low levels of U.S. yields in light of the economy's strength and ongoing inflation.