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Roger J Kerr sees US growth, capacity utilisation and inflation as the main drivers of global interest rate directions and he sees big rises over the next year

Roger J Kerr sees US growth, capacity utilisation and inflation as the main drivers of global interest rate directions and he sees big rises over the next year

 By Roger J Kerr

Over recent weeks I have opined as to how high our longer-term wholesale swap interest rates could increase from current levels of 5.0% for 10 years.

The potential or probability for 10-year swap interest rates to increase by between 1.0% and 1.5% over the next 12 months is reasonably high in my view.

However, over recent weeks our long-term swap rates have reduced as US 10-year Treasury bond yields (which they religiously follow) have slid back from 2.90% to 2.65% due to weaker than expected US economic figures (largely climate related) and a wider safe-haven bond buying by investors due to Emerging Markets uncertainties (the latest being the Ukraine over the weekend).

I have concluded that having been wrong on the interest rate direction in the short-term, I need to support the medium term view with poignant charts about why US 10-year Treasury bond yields will be rising over coming months.

While there is much debate as to the momentum and evenness of the US economic recovery, the variables the in the end determine long-term interest rate levels do not change; that is, GDP growth, capacity utilisation and inflation.

All three are inter-related, as stronger GDP growth leads to higher capacity utilisation in manufacturing sector and that in turn creates bottlenecks in the economy that leads to prices being increased.

Two of the three charts below (GDP and Capacity Utilisation) are consistent in their theme and confirm why US 10-year Treasury bond yields are set to increase significantly over the next 12 months.

US annual inflation has been pushed down by the shale gas revolution over the last 12 months, however such price decreases will not repeat over the next 12 months. 

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Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com

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3 Comments

Good reasons to stay floating, or 6 months and enjoy low rates right now. 

The vulnerability of the world economy, and fragile nature of US recovery will see low-ish for longer, if a couple small rises. 

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I love the way so called 'experts' and banks try to talk up the rates. There are currently as many, if not more, reasons for our rates to actually drop. Helping the banks spread misery by increasing rates (which are already amongst the highest in the world) is simply irresponsible.

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Ahh another prediction. But was't our dollar meant to be under 81cents US by now? and sub 90 cents AU?

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