Are U.S. interest rates low because of… Spain?
As off-the-wall as it may see for some U.S. investors, many of the countries that nearly caused an unraveling of the European Union now have interest rates close to that of the United States.
The benchmark 10-year yield on Spanish bonds is now below 3 percent. Italian yields are just 50 basis points above that. Portugal's 10-year yield is now at around 3.63 percent. Greece, the only one of the "PIGS" to not be near 3 percent, still has a 10-year at 6.17 percent. That's almost half of what it was last summer.
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Ari Wald, head of technical analysis at Oppenheimer & Co., says low overseas rates are one of the reasons U.S. rates aren't higher.
"I think traders are having a hard time justifying higher Treasury yields for that reason exactly," said Wald. "Economic data is improving in Spain but not to the point where … that spread between Treasurys and Spain have come in as much as they have."
Portfolio manager Chad Morganlander of Stifel's Washington Crossing Advisors takes a different view. He believes that while European sovereign debt may be somewhat bubbly because of actions by the European Central Bank, it's really U.S. fundamentals that are keeping Treasury yields where they are. One key indicator Morganlander is looking to is consumer credit creation.
"In normal times post-World War II, [household credit] grows around 6 percent," said Morganlander. "When you’re in a recession, it decelerates but continues to grow around 3 percent. Currently, courtesy of the Federal Reserve [it] is only growing around 1 percent. Hence the reason why the long end of the yield curve is where it is."
However, Morganlander sees an eventual uptick in rates later this year. "GDP growth, which is going to be the main driver of interest rates, is going to start to reaccelerate," Morganlander said. "And, when that happens, rates on the long end of the yield curve will go higher."
"So, we’re bullish on the economy and we believe that rates will go higher."
To see the full discussion on the 10-Year Treasury Note, with Wald on the technicals and Morganlander on the fundamentals, watch the above video.