Ultra-Loose Monetary Policy Supporting Atypical Recovery

Good economic data out of the US, including very positive small business sentiment indicators, and the UK, with a blockbuster employment report out on June 11, provide further evidence that global growth is set to accelerate as 2014 progresses, in line with our view. That is not to say, however, that a rising tide is carrying all ships. The eurozone remains a major weak point in the global economy with persistent sluggish growth and dangerously low inflation motivating the European Central Bank (ECB) to deliver a range of monetary easing measures on June 5. On this note, perhaps the most striking feature of the global economy at present is just how loose monetary policy is and how low fixed income yields have dropped. In addition to recent ECB easing, the central banks of China, Mexico and Turkey have recently eased monetary policy. At this stage, we estimate that countries representing just over 50% of global GDP are running zero interest rate policies, including three of the four largest economies in the world (US, eurozone, Japan).

This is having a significant impact. Bonds have rallied, with peripheral eurozone yields in particular going to absurdly low levels. The chart below shows that Spanish 10-year government bond yields are now below the previous lows recorded in 2005, having been caught up in the turbulence of the eurozone sovereign debt crisis only 18 months or so ago. Greek 10-year yields at 6% stand out even more and suggest that the global economy has entered unchartered territory. Indeed, Greece underwent the biggest sovereign debt restructuring in history as recently as 2012, and the debt load today is higher than what is was before the first bailout commenced in 2010, but demand for the most recent Greek 5-year issue was nonetheless heavily oversubscribed.

Given that we expect the euro to depreciate versus the US dollar, and considering the very low (and falling) yields on eurozone sovereign debt, US treasuries look all the more attractive. So long as 10-year bonds in Japan are yielding 0.6%, and Spanish and Italian yields are yielding under 3.0%, it is difficult to see their US equivalents rising much beyond 2.8% for the time being.

UK Posts Record Job Gains
UK - Employment Change, 3m/3m

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