Why Are Interest Rates So Low in the US Despite Global Trends?

The interest rates in the United States have been notably low in recent years, defying global trends. This article explores the reasons behind this phenomenon and discusses the implications for investors and the broader economy.

Key Factors Contributing to Low Interest Rates in the US

Interest rates in the US have been artificially kept low in order to stimulate economic growth and provide a buffer against recession. Politicians and central bankers aim to secure favorable economic conditions to ensure their agendas and policies are met, leading to long-term stability and economic growth. (Source: Google Trends on US interest rates)

Current Status of Global Interest Rates

While interest rates in the US have been relatively low, there are instances where rates are even lower in some developed economies:

Japan and Germany have interest rates that are significantly lower compared to the US. As seen from the central banks' summary, the yield on a 10-year Japanese bond is approximately 0.25%, while a 10-year German bond yields about 1.60%. In contrast, the 10-year US Treasury bond offers a yield of about 3.30%.

The below table provides a quick reference of interest rates on 10-year government bonds in various countries:

Country 10-Year Bond Yield (as of 2023) Japan 0.25% Germany 1.60% US 3.30% France 0.33% Spain 0.98% Portugal 1.15% UK 1.10%

Impact of Quantitative Tightening (QT)

The US Federal Reserve (Fed) has been undergoing a period of quantitative tightening (QT) rather than quantitative easing (QE). Since 2014, the Fed has been reducing its balance sheet by allowing maturing securities to roll off without replacing them. Despite these efforts, interest rates have not increased significantly. This is largely due to the global economic situation and the search for safe havens by investors from countries facing economic challenges.

International Investment Trends and Economic Stability

Investors from countries with less favorable economic conditions are increasingly choosing to park their money in the US Treasury bonds. These investors, especially institutions, are seeking higher yields and a safer environment. For example, a Japanese institution would not invest in Japanese government bonds because it would have to pay the government interest on the money it lends to them. Similarly, institutions from Switzerland, Germany, and other European nations are looking for better returns and economic stability.

Comparing the youth unemployment rates in these countries further highlights the differences:

Country Unemployment Rate (April 2023) US 8.3% Portugal 17.8% France 20.1% England 11.5% Spain 32.6% Italy more than 20% Greece more than 20%

The figures for countries like Italy and Greece are even worse, indicating a significantly higher risk of economic instability. Consequently, these institutions are more inclined to choose the US Treasury bonds, which offer a higher return and a more stable economic environment.

Moreover, the US dollar's appreciation against other currencies has made the 10-year Treasury bonds more attractive, as they provide better returns. The higher yields on US bonds are twice that of any other mentioned country, providing a compelling reason for investors to consider the US market.

Conclusion

The current low interest rates in the US are a result of a combination of factors, including economic stability, global economic conditions, and the search for safe havens. While other developed economies have lower interest rates, the economic stability and favorable environment in the US make it an attractive option for investors seeking higher returns and a safer investment.