Cortopassi wrote:I've asked before, without any answers I understand:
--Why are US long treasuries at such a higher interest rate than various European and Asian countries? Only European country with a higher yield is Greece! I would think the US should be the lowest of virtually anywhere except what, Japan and Germany?
--So looking at it this way, I would say US bonds still have a better than 50/50 chance of increasing in value and dropping yield.
I put your question to a high school friend of mine who works for Pimco. Here is his response:
There is a lot underneath your question. Intl Govt Bond yields are impacted by:
Inflation Expectations in each country
Growth Expectations in each country
Short Term borrowing rates in each country
Perceived safe haven status
Central Bank bond buying actions (known as QE)
Amount of debt issuance
All of these are in play in the answer today. But I do not have time to type a whole book. A few key points for now:
-US deficits will be growing due to new tax law; there needs to be more US treasury issuance to accommodate; more issuance (supply) means price goes down (and yield goes up)
- Foreign governments are still VERY active in QE; ECB continues to buy almost $60 billion per month; Japan’s MOF keeps 10 year yields at 0% by mandate and buys whenever they rise to 0.10% and sells whenever they reach -0.10%; for a few years, German Bunds were negative yields too as everyone was afraid to keep money in the banks, they all bought Bunds
- a more regular impact is from short rates in each country; when an institutional investor buys a Euro Gov’t Bond, they must sell dollars, buy euros, then buy the bond; many do this as a financed trade, so calculation must include borrowing in Euro with short rate (detractor) from return; and receiving short US rates
Lastly today has an interesting twist. One would think with the much higher US rates, the currency would be doing well (it hasn’t). This conundrum is discussed in a short blog on our website pimco.com from Mohsen Fahmi.
This is me writing again. My guess would have been that the yield disparity between countries was mostly a result of currency risk. I guess that is only one factor but it's pretty easy to imagine that a person living in Europe, say, and buying US bond yielding 3% annually, could get hammered by a 5-10% drop in the Euro.