Connecting Some Dots Into Useful Economic Information – Week 3

Global Bond Market Trends:

The demand from overseas investors for U.S. Treasuries, especially the 10-year Treasuries has been remarkable. In a variety of articles and analyses a list of forces have been given as explanations for the sensational demand which has dropped interest rates on 10-year Treasuries down to a remarkable low, approximately 1.7% per annum. The reasons given have been the following:

  1. The U.S. Dollar is the currency of the Hegemon of the world.
  2. The U.S. Dollar is very strong.
  3. The American government policy is to have a strong currency, and therefore an investment in the U.S. Treasuries is comforting to foreign investors who are watching currencies of other countries devalue.
  4. European interest rates are significantly in the negative so that it creates a profitable spread – 10-year Treasuries at 1.7% compared to the European Central Bank (ECB) 10-year treasury which has a -0.5%, making the spread about 2.2%.

Higher demand for U.S. Treasuries reduces our interest rates and supports the value of assets including real estate. But it is an unusual combination of economic forces that at some point will shift.

Our next blog series will examine the housing crisis (which is real), its origins, impacts and solutions.