Since May, interest rates around the world have generally risen, led by the U.S. and its Federal Reserve initiating a discussion on tapering its asset purchases. At OppenheimerFunds we continue to believe that the Fed will not actually begin hiking its policy rate until 2015, but the potential for tapering can be viewed as the first step in a process of transitioning monetary policy from easing to tightening.
While economic data in the U.S. shows that its economy is on more positive ground than it has been since 2008, we believe that the scale and pace of the rise in rates in other developed markets is unjustified given the economic positions of many of those nations’ economies. We believe that this has the potential to provide attractive opportunities within developed market debt.
Developed Markets Rise in Rates Nearly Match Those in the U.S.
As of Aug. 30, 2013, the U.S. 10-Year Treasury bond yield had risen by 1.16% from its most recent low on May 2. However, a look at other large developed markets shows that rates increased there as well, in some cases by almost as much as in the U.S.
For example, the interest rate on an equivalent 10-year bond issued by the Eurozone, Australia and the UK rose by 0.70%, 0.90% and 1.15%, respectively, over the same time period.
International Economic Conditions Don’t Justify These Rises
The U.S. economy has officially been out of its recession for four years and, in fact, the yield on the 10-Year U.S. Treasury bond has been rising for more than a year since its all-time low of 1.39% on July 24, 2012. While the economic data hasn’t been overwhelmingly positive, the situation is very different from what it was a few years ago. The housing market continues to recover gradually, unemployment has continued to decline at a slow but somewhat steady pace, and real GDP is now comfortably higher than the pre-financial crisis peak.
The picture is very different in Europe, where the Eurozone has only recently emerged from recession and the UK continues on a path of dismal growth. In the case of the Eurozone, core and semi-core nations now have modestly positive economic growth, while peripherals like Italy and Spain are still contracting (albeit less than expected). It is important to note that overall output is still lower than the pre-crisis peak for Europe.
The bottom line is that we see current interest rates in developed market countries outside the U.S. being potentially higher than their economies currently warrant. This was largely due to the situation in the U.S., which pulled international rates up higher when many of their economies were at a very different phase of the business cycle. Given this, we see opportunity for developed market debt as these interest rates could potentially fall back to lower levels until such time that their respective economies can support higher rates, all the while creating attractive opportunities at their current levels.
Past performance does not guarantee future results.
Fixed income investing entails credit risks and interest rate risks. When interest rates rise, bond prices generally fall, and a fund’s share price can fall. Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes and political and economic uncertainties. Emerging and developing market investments may be especially volatile.
These views represent the opinions of OppenheimerFunds and are not intended as investment advice or to predict or depict performance of any investment. These views are subject to change based on subsequent developments.
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RPL0000.182.0913 September 17, 2013