By Alexander Tecle
Why is it important to keep track of U.S. Treasury interest rate levels? How do they impact interest rates globally?
It is important because the U.S. Treasury yield curve is the first mover of all domestic interest rates and the most influential factor in setting global interest rates. Interest rates on all domestic bond categories rise and fall based on the yield activity within the U.S. Treasury market. In general, investors view the US. Treasury security as the risk-free rate, or least risky security in the global markets. Investors use the Treasury yield-curve (yields for treasuries at all maturities) as an acceptable yield-for-risk benchmark for all bond investments at higher risk levels.
How does the Federal Reserve influence the direction and activity of the yield curve?
The Federal Reserve directly affects the short-term side of the yield curve by setting the Federal Funds Rate. The Fed Funds rate is the rate at which banks charge each to lend capital to each other during the overnight cycle. The Federal Reserve also controls the prices of treasuries and other bonds in the market by their open market operations that purchase and sell of bonds by increasing the supply of bonds or reducing the supply of bonds in the market place. This process is called quantitative easing or tightening. At this moment, the Federal Reserve is in the process of tightening monetary policy, which is encouraging the U.S. treasury yield curve to rise and push up U.S. bond yields. This action is quite common in the later part of the economic-cycle after an extended period of economic growth and expansion. Please select the link below to review the current treasury yield environment and U.S. credit yield environment.
How is the Federal Reserve rate policy different then other central bank around the globe?
In developing nations, such as the European Union, Japan, and Australia, the central banks are working cohesively to loosen monetary policy and encourage a relatively low interest rate environment. The European Central Bank, Central Bank of Japan, and others have been engaged in hyper quantitative easing operations to bring the key overnight lending rate into negative territories with the intent to discourage investing into their government bonds and encourage the market to invest into higher risk assets. (Such as stocks, corporate bond, private equity, etc.) The primary motive is that the developed market economies have struggled to produce substantial and prolonged periods of economic growth and expansion. The difference between the progress of the U.S. and Developed-International economic cycles has been a thematic concern for monetary policy makers. This concern has resulted in a divergence of global rate policies amongst global central banks and substantial difference in the price of bonds yields around the world that can be observed rather easily. Select the link below to view developed-international market interest rates globally.