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Weekly Credit Insight

Chart of the week: the US moves one step closer to the rest of the world

The market sell-off earlier this year has increased the chance that interest rates will be lower for longer and has driven a convergence between yields in the US and the rest of the world (see figure 1).

Figure 1. Yields converge

Source: Federated Hermes, Bloomberg, as at July 2020.

Prior to this year, the outperformance of the US economy relative to Europe had driven a divergence in interest rates in each region. But the coronavirus pandemic prompted the US to ease its policy stance, taking it one step closer to the ultra-low rates seen in Europe and Japan.

Lower interest rates in the US have far-reaching implications for global asset allocators, given that more than half of global fixed income is denominated in US dollars. As fixed-income markets start to recover from the worst first of the year in two decades, the growing stock of negative-yielding assets will bolster demand for global credit – as will support from central banks and the attractive position of bonds relative to equities.

Moreover, the outside chance that the Federal Reserve follows Japan and Australia and implements yield-curve control will keep interest-rate volatility1 low, something that has historically supported flows into spread products.

  1. 1As measured by the ICE Bank of America MOVE Index

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