In our view the credit markets are the most important of all, and are an important determinant to exchange rates over the very long term, itself the most liquid market. Credit is essential for all forms of commerce, industry, and property, and its cost will determine what is viable and what is not. Needless to say the old adage remains true: the more you need the money, the harder it is to come by, and the more expensive it gets.
In today's world of ultra-loose monetary policy and negligible inflation in many countries, some of the rules about granting credit have been turned on their head. In others the old rules still apply, but compression in absolute values, credit spreads, and ratios mean relatively small moves because we are working with such very tiny numbers. Negative numbers have a whole new set of rules.
Kicking off with the yield on the benchmark US 10-year Treasury Note - currently lower than when the Fed Funds target was raised on 16 December - which is not exactly a vote of confidence in the board of the Federal Reserve. January's retreat from trend line resistance puts rates back in the middle of last year's range (1.65 to 2.50 per cent). A break below the psychological level of 2.00 should set off a retest of a cluster of support levels around 1.75-1.80. We do not rule out a retest of 2012's record low at 1.38 per cent. More importantly, we see rates above 2.50 per cent as very difficult to sustain, and the chance of 3.00 per cent or more, negligible. Low rates for longer and the Fed might have got it all wrong.
Yield on US 10-year Treasury Notes
Turning to 10-year UK gilt yields, I'm finding it hard to believe they yielded less than US Treasury Notes throughout last year; not a lot, but I can remember when the spread was consistently the other way around. Price action for months now suggests we have become used to the idea that we'll probably hover sub-2.00 per cent for a while yet, and although rather close to the record low at 1.40, there is nothing to suggest a bottom has been hit. It's worth remembering that UK interest rates stayed very low for decades in the late 19th century.
UK 10-year gilt yield
For those who think that once a low is in place the only way is up for interest rates, I draw your attention once again to the yield on Japanese benchmark 10-year government bonds. Despite grim government finances, a persistent tendency towards deflation has kept rates ultra-low for the best part of 20 years. During 2015 investors appear to have got their heads around even lower rates, consolidating under what had been a record low 0.45 per cent in 2003 (because of a banking crisis). A break to a new record low looks imminent, and remember that zero is no longer the lower boundary.
Benchmark 10-year JGB yield
As our final example attests - German government two-year Schatz yield minus 0.37 per cent. This has dragged rates lower across the eurozone, and no signs of bottoming out.
Negative Schatz yield
