Global | Interest rates, more than monetary policy

In 2023, interest rates on debt have reached levels not seen since the financial crisis in the U.S. and the 2011 debt crisis in the eurozone. During the first part of 2023—similar to what occurred in 2022—short-term interest rates led the hikes.

Key points

• Key points:
• This came after persistent inflation prompted central banks to continue with the most aggressive rate hikes in decades. However, since the summer, the dynamics have changed; it is long-term interest rates that are leading the hikes.
• In order to understand this last rate hike, it is key to break down the rates into two components that are not directly observable: expectations for short-term rates and term premium. While both factors influence the trend in rates, it is the latter that has had the greatest impact on the recent rate hike.
• The term premium is a dynamic variable that fluctuates in response to various factors, such as uncertainty about expected inflation, economic activity and monetary policy decisions, in addition to some other factors that have had an impact in recent weeks, such as fiscal matters, which are playing a critical role.
• In addition, the current trend of diversifying reserves, as well as the economic slowdown, are causing some governments to reduce the share of their savings that they have invested in U.S. Treasury and eurozone bonds.
• In past cycles, bond yields have peaked when monetary policy is at its highest. As a result, yields could be close to their peak levels, given that the Federal Reserve, the European Central Bank and the Bank of England have likely concluded their rate hike cycles.

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