Nearly four years ago, a post on this blog asked “‘how far can interest rates possibly fall’ and ‘how long can interest rates stay so low?’” At the time a few European nations had recently issued short term bills with negative yields. Fast forward to today and nations such as Germany, Japan and France all have five-year government bonds yielding less than zero. In addition, a number of national central bank key rates have been lowered to subzero levels including Japan, Sweden, Denmark, Switzerland. The European Central Bank’s main rate stands a zero.
In the 2012 post Japan was provided as an extreme example of low government bond yields. The 10-year bond yield at the time was just under one percent. Today it trades with a negative yield.
In the post it was noted that, from a local peak on September 28, 1990 in Japan and June 12, 2007 in the U.S., there was a high correlation between the 10-year government bond yields. The years following those peaks saw each nation enter a deep recession followed by a sluggish recovery. Following each crisis the national central banks stepped in lowered their rates and enacted non-traditional policies to attempt to reduce high unemployment, create moderate inflation and stimulate the economy.
The time shifted correlation changed after 2012. U.S. yields rose quickly mid-2013 as the U.S. Federal Reserve announced it would slow the purchase of government bonds. Since late 2013 the correlation picked back up. However, instead of being a few percentage points below the historical Japanese 10-year, the U.S. 10-year has been slightly higher.
While Japan continues to struggle with creating stable positive inflation the U.S. has recently experienced rising core consumer inflation. Improving economic conditions, including moderate, stable inflation could create the conditions for rising interest rates in the U.S. and escape the time-shifted correlation to 1990s Japan.