ISMS 4: Bond Yields Are Showing the Fed Has Won Its Battle Against Inflation

EM don’t have reserve currency status, unlike DM they never benefited from zero ratesOver the past 12 months, the World average 3mth gov’t bond rate rose from 1.7% to 5.0%That 3.3ppts rise highlights the rising interest rate environment we have been living throughIn the Developed markets 3mth rates rose from zero 12 months ago, before the Ukraine war started, to the current 3.3%Despite this strong rise, DM’s interest rates remained at a 1.7ppt discount to the world averageMeaning EMs were rising equally fastSo, let’s look at EMsOver the past year, 3mth rates rose from an already high 4.3% to 7.4%, up 3.1ppts, double the rate of DMs and a 2.4ppt premium to the World averageDM 10yr yield starting to fall, anticipating lower inflation; EM flat for a yearWorld LT interest rates rose from 2.8% 12 months ago to 4% today, a 1.2ppts riseDeveloped markets saw a YoY interest rate rise from 1.2% to 2.9%, up 1.7ppts riseDM’s discount to the world interest rates rose from negative 1.6ppts to negative 1.1pptsEM had a small rise from 5.1% to 5.6% YoY, a small 0.5ppts rise on an already high rateEM premium to world fell from 2.4ppts to 1.6pptsKey points & the bottom lineEM never had reserve currency status, so unlike DM, they never benefited from zero ratesSince rates have always been higher, borrowers in EMs have not had the same incentive to borrow as in the DMs; therefore, the balance sheet quality is strongUS led the rise, DM Europe is catching up, DM Pacific is now at a deep discount to world ratesDM Americas rose from 0.2% to 4.7%, up 4.5pptsIts relative discount to the world narrowed from negative 1.5ppts to negative 0.3pptsUS led the rise, DM Europe is catching up, Japan now at a deep discount to world ratesDM Europe rose from negative 0.4% to 2.5%, up 2.9pptsIts relative discount to the world widened from negative 2.1ppts to negative 2.5pptsDM Pacific rose from 0% to 1.1%Its relative discount widened from negative 1.7ppts to negative 3.9pptsDM Europe LT rates rose most aggressively from near zero, preventing a currency collapseDM Americas rose from 1.8% to 3.4%, up 1.7ppts; rel. discount narrowed from -1% to -0.6%But LT rates fell slightly in January showing the market believes inflation has been tamedDM Europe rose from 0.6% to 2.8%, up 2.2ppts; rel. discount narrowed from -2.1% to -1.2%DM Pacific rose from 0.7% to 1.4%, 0.7ppts; rel. discount widened from -2% to -2.6%Key points & the bottom lineUS led the rise, DM Europe is catching up, DM Pacific is now at a deep discount to world ratesDM Europe LT rates rose most aggressively from near zero, preventing a currency collapseImportantly, LT rates fell slightly in January showing the market believes inflation has been tamedClick here to get the PDF with all charts and graphs Andrew’s booksHow to Start Building Your Wealth Investing in the Stock MarketMy Worst Investment Ever9 Valuation Mistakes and How to Avoid ThemTransform Your Business with Dr.Deming’s 14 PointsAndrew’s online programsValuation Master ClassThe Become a Better Investor CommunityHow to Start Building Your Wealth Investing in the Stock MarketFinance Made Ridiculously SimpleFVMR Investing: Quantamental Investing Across the WorldBecome a Great Presenter and Increase Your InfluenceTransform Your Business with Dr. Deming’s 14 PointsAchieve Your GoalsConnect with Andrew Stotz:astotz.comLinkedInFacebookInstagramTwitterYouTubeMy Worst Investment Ever Podcast