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Does the US have a “Credit Risk Spread” vs Other Nations?

Posted By Barry Ritholtz On April 10, 2006 @ 6:11 am In Economy,Federal Reserve,Fixed Income/Interest Rates | Comments Disabled

Why have yields on US Treasuries been so much above other nations?

I am not referring to the recent spurt on the 10 year towards 4.98%; Rather, I am referencing the generally higher yield on US Treasuries versus other westernized nations (UK, Canada, Germany, Japan).   

In the past, we have seen this spread occurring in periods of elevated US risk:

click for larger graph
Global_yields [1]

Source:  Bloomberg

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Justin Lahart [2] notes the impact of the dollar on this process:

Rates_comparos
"U.S. stocks are getting repriced versus foreign stocks. Between 2002 and 2004, this rebalancing happened largely because the value of the dollar was declining, dragging down the value of U.S. investments. But last year, when the dollar rallied, it was through relative stock prices. U.S. stock markets simply couldn’t keep up with rivals abroad.

The same can be said of the bond market. Last year long-term U.S. Treasury securities underperformed long-term government bonds in Europe and Japan. Because bond yields move in the opposite direction of their prices, that’s another way of saying that U.S. interest rates rose relative to their overseas counterparts. Today, the yield on a 10-year U.S. Treasury note, 4.79%, is higher than yields in places like Germany, the U.K. and Japan . . .

The good news here is that Treasury bonds now provide overseas investors with better yields and U.S. stocks look cheaper relative to overseas stocks. That helps to keep attracting foreign capital. The bad news, says Mr. Prince, is that the repricing isn’t finished.

I am not sure its purely a currency issue, since it seems to persist regardless of whether the greenback is rallying or taking a dive. As the chart at top shows, it often peaks near an "event."

I’m curious if the yield has anything to do with the geopolitics of Iraq, our twin deficits, or something else entirely.

Thoughts?

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Source:

Losing Ground [2]
AHEAD OF THE TAPE
JUSTIN LAHART
March 29, 2006; Page C1
http://online.wsj.com/article/SB114359074458810581.html


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[1] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/global_yields.PNG

[2] Justin Lahart: http://online.wsj.com/article/SB114359074458810581.html

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