Here’s a Change: U.S. Borrowing Costs Among Highest in Developed World

The power of higher U.S. yields to shift markets is evident in things that haven’t happened in nearly two decades

By Richard Barley


RATE RACE
Ten-year Government Bond Yields



As if there weren’t enough evidence that the ground is shifting in markets, here’s something that hasn’t happened in nearly two decades: America is paying more to borrow than Australia.

For the first time since 2000, U.S. 10-year yields, at 2.88%, are above those of Australia, at 2.84%, notes ADMISI, a brokerage unit of agricultural giant Archer Daniels Midland . At first glance, this makes sense. Benchmark yields have converged as the U.S. Federal Reserve has raised rates while the Reserve Bank of Australia has stood pat. Indeed, the Fed is treading a lonely path, with other central banks still far behind in the policy stakes.

For investors, however, this turns a familiar backdrop upside down. Australia and New Zealand have for decades been the highest-yielding government-bond markets among advanced economies, with higher rates needed thanks to sizable current account deficits and higher inflation in the past. But now New Zealand, with a 10-year yield of 2.96%, is only just stopping the U.S. from claiming the high-yielder crown.
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The Federal Reserve building in Washington, D.C. Benchmark yields have converged as the Fed has raised rates. Photo: Stephen Voss for The Wall Street Journal 



And what might be more remarkable is what the U.S. dollar is doing at the same time. The last time Australian and U.S. yields crossed, the greenback was rising; now it is falling even as U.S. assets should appear more attractive thanks to higher yields.

The benign explanation is that better-than-expected growth outside the U.S. has buoyed other currencies against the dollar: U.S. investors are looking for opportunities globally rather than domestically.


DOWN UNDER
Yield spread of 10-year Australian
government bonds over U.S. Treasurys 

 



In the case of places like Australia, the story for now is about yield convergence, but it may also eventually be about higher yields generally. Despite differences in monetary policies, higher U.S. yields may lift rates elsewhere thanks to the global heft of the Treasury market. At the same time, other central banks are starting to move gradually away from loose monetary policy.

The less comfortable explanation is that rising Treasury yields and a softer dollar represent a necessary discount on U.S. assets as investors worry about the consequences of tax cuts and higher spending on the economy. Treasurys and the dollar might just be two sides of the same coin for now.


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