Global Competition in Bond Yields

It’s a well-known economic story where the financial press has in recent years increased its coverage of the global economy and the U.S.’s place in it. Still the largest global economy by far as measured by GDP, the U.S. is critically dependent on other economies to buy our debt. Without foreign purchases of U.S. securities, the GDP growth we have would not be possible and certainly, U.S. interest rates would be significantly higher than they are now. Within this context and the U.S.’s need to finance its debt, it’s a reasonable proposition to keep an eye on the competition, particularly the competition for bond yields. With other global economies achieving higher GDP levels than the U.S., their own bond yields and inflation rates have increased, giving our debt markets some serious competition. When you consider that the potential downside of any foreign investment in U.S. securities includes currency risk and when you see that the value of the U.S. dollar has been down over the past year, hurting foreign investor’s returns, it’s a wonder these foreigners continue to invest in the U.S. Granted, significant benefits accrue to these investors, such as greater security and liquidity, but this advantage to U.S. markets is eroding as well. The answers come in the form of the need of the U.S. to reduce its debt burden significantly and soon, tackling the federal budget deficit as well as consumer indebtedness. Simultaneously, domestic savings rates need to rise to provide needed investment funds, while the Fed should remain diligent in its quest for price stability. Absent these efforts and others, in order to remain competitive and finance our debt, domestic interest rates would likely be forced to rise – to what level is another debate, but rise they would, just to finance the debt we have outstanding. To back this discussion up with statistics, view the following:
Country Current Yield Yield 1 Year Ago Difference CPI GDP GDP Rank
U.S. 5.03% 5.14% -0.11% 2.7% 1.9% 1
Japan 1.87% 1.83% +0.04% 0.0% 2.6% 2
Germany 4.56% 4.30% +0.26% 1.9% 3.6% 3
China 4.43% 3.13% +1.30% 3.4% 11.1% 4
U.K. 5.46% 4.60% +0.86% 2.5% 6.2% 5
France 4.62% 4.08% +0.54% 1.2% 4.0% 6
Italy 4.77% 4.24% +0.53% 1.9% 5.2% 7
Canada 4.55% 4.61% -0.06% 2.2% 2.3% 8
Spain 4.62% 4.06% +0.56% 2.3% 7.6% 9
Russia 6.05% 6.78% -0.73% 7.8% 7.9% 10
India 8.15% 8.19% -0.04% 7.7% 9.1% 12
Brazil 6.10% 7.11% -0.99% 3.2% 4.3% 11
Australia6.26% 5.78% +0.48% 2.4% 3.8% 15

While market yields in some countries have turned down over the past year, in general, most yields are up, particularly in those countries where economic growth has been the strongest, providing increasing competition between the U.S. and other countries for their investment funds.