ISMS 4: Bond Yields Are Showing the Fed Has Won Its Battle Against Inflation

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EM don’t have reserve currency status, unlike DM they never benefited from zero rates

  • Over the past 12 months, the World average 3mth gov’t bond rate rose from 1.7% to 5.0%
  • That 3.3ppts rise highlights the rising interest rate environment we have been living through
  • In the Developed markets 3mth rates rose from zero 12 months ago, before the Ukraine war started, to the current 3.3%
  • Despite this strong rise, DM’s interest rates remained at a 1.7ppt discount to the world average
  • Meaning EMs were rising equally fast
  • So, let’s look at EMs
  • Over the past year, 3mth rates rose from an already high 4.3% to 7.4%, up 3.1ppts, double the rate of DMs and a 2.4ppt premium to the World average

DM 10yr yield starting to fall, anticipating lower inflation; EM flat for a year

  • World LT interest rates rose from 2.8% 12 months ago to 4% today, a 1.2ppts rise
  • Developed markets saw a YoY interest rate rise from 1.2% to 2.9%, up 1.7ppts rise
  • DM’s discount to the world interest rates rose from negative 1.6ppts to negative 1.1ppts
  • EM had a small rise from 5.1% to 5.6% YoY, a small 0.5ppts rise on an already high rate
  • EM premium to world fell from 2.4ppts to 1.6ppts

Key points & the bottom line

  • EM never had reserve currency status, so unlike DM, they never benefited from zero rates
  • Since rates have always been higher, borrowers in EMs have not had the same incentive to borrow as in the DMs; therefore, the balance sheet quality is strong

US led the rise, DM Europe is catching up, DM Pacific is now at a deep discount to world rates

  • DM Americas rose from 0.2% to 4.7%, up 4.5ppts
  • Its relative discount to the world narrowed from negative 1.5ppts to negative 0.3ppts

US led the rise, DM Europe is catching up, Japan now at a deep discount to world rates

  • DM Europe rose from negative 0.4% to 2.5%, up 2.9ppts
  • Its relative discount to the world widened from negative 2.1ppts to negative 2.5ppts
  • DM Pacific rose from 0% to 1.1%
  • Its relative discount widened from negative 1.7ppts to negative 3.9ppts

DM Europe LT rates rose most aggressively from near zero, preventing a currency collapse

  • DM Americas rose from 1.8% to 3.4%, up 1.7ppts; rel. discount narrowed from -1% to -0.6%
  • But LT rates fell slightly in January showing the market believes inflation has been tamed
  • DM Europe rose from 0.6% to 2.8%, up 2.2ppts; rel. discount narrowed from -2.1% to -1.2%
  • DM Pacific rose from 0.7% to 1.4%, 0.7ppts; rel. discount widened from -2% to -2.6%

Key points & the bottom line

  • US led the rise, DM Europe is catching up, DM Pacific is now at a deep discount to world rates
  • DM Europe LT rates rose most aggressively from near zero, preventing a currency collapse
  • Importantly, LT rates fell slightly in January showing the market believes inflation has been tamed

Click here to get the PDF with all charts and graphs

 

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Welcome to My Worst Investment Ever podcast hosted by Your Worst Podcast Host, Andrew Stotz, where you will hear stories of loss to keep you winning. In our community, we know that to win in investing you must take the risk, but to win big, you’ve got to reduce it.

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