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

<h2><strong>EM don’t have reserve currency status, unlike DM they never benefited from zero rates</strong></h2><ul><li>Over the past 12 months, the World average 3mth gov’t bond rate rose from 1.7% to 5.0%</li><li>That 3.3ppts rise highlights the rising interest rate environment we have been living through</li><li>In the Developed markets 3mth rates rose from zero 12 months ago, before the Ukraine war started, to the current 3.3%</li><li>Despite this strong rise, DM’s interest rates remained at a 1.7ppt discount to the world average</li><li>Meaning EMs were rising equally fast</li><li>So, let’s look at EMs</li><li>Over 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 average</li></ul><br/><h2><strong>DM 10yr yield starting to fall, anticipating lower inflation; EM flat for a year</strong></h2><ul><li>World LT interest rates rose from 2.8% 12 months ago to 4% today, a 1.2ppts rise</li><li>Developed markets saw a YoY interest rate rise from 1.2% to 2.9%, up 1.7ppts rise</li><li>DM’s discount to the world interest rates rose from negative 1.6ppts to negative 1.1ppts</li><li>EM had a small rise from 5.1% to 5.6% YoY, a small 0.5ppts rise on an already high rate</li><li>EM premium to world fell from 2.4ppts to 1.6ppts</li></ul><br/><h2>Key points &amp; the bottom line</h2><ul><li>EM never had reserve currency status, so unlike DM, they never benefited from zero rates</li><li>Since 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 strong</li></ul><br/><h2><strong>US led the rise, DM Europe is catching up, DM Pacific is now at a deep discount to world rates</strong></h2><ul><li>DM Americas rose from 0.2% to 4.7%, up 4.5ppts</li><li>Its relative discount to the world narrowed from negative 1.5ppts to negative 0.3ppts</li></ul><br/><h2><strong>US led the rise, DM Europe is catching up, Japan now at a deep discount to world rates</strong></h2><u