US Long-Term Interest Rates Rise Due to Shifting Global Economic Forces
Long-term U.S. government bond yields are reaching levels not seen since 2008, driven by fundamental shifts in global savings and investment rather than solely by the current war or Federal Reserve policy. While the war's impact on energy prices and inflation, and the Fed's cautious stance, play a partial role, the primary drivers are deeper and have been in motion for years.
The "natural rate" of interest, which balances savings and investment to maintain high employment and low inflation, has been on an upward trend. This rate, which influences all other borrowing costs, saw a steady decline from the early 1980s to around 2015, falling from approximately 5% to a low of 1.6%. Current estimates place the real natural rate at nearly 2.6%, translating to a nominal yield of about 4.7% on ten-year bonds, closely matching the market's current 4.8% yield.
Several forces that previously kept rates low have reversed. The Baby Boomer generation is now drawing down savings instead of accumulating them for retirement. China, a major purchaser of U.S. debt, has reduced its foreign exchange reserves. Geopolitical events, such as the freezing of Russian reserves, have introduced political risk to reserve assets, and European NATO members are increasing defense spending, leading to higher borrowing costs globally.
Furthermore, U.S. public debt has surpassed 100% of GDP, with projections reaching 111% by 2030. This increased borrowing, coupled with a surge in investments for artificial intelligence infrastructure, is creating a genuine demand for capital for the first time in years.
In Israel, the situation is currently different, with the Bank of Israel's interest rate falling and the ten-year government bond yield around 3.9%. However, the global rise in long-term rates affects Israeli savers through their holdings of both local and foreign bonds, impacting the dollar exchange rate and local bond pricing. While the era of near-zero returns on bonds is over, the potential for higher yields on government debt is seen as a positive development for conservative investment portfolios, despite increased borrowing costs for governments and corporations.
