금융시장
Money Flow Analysis Series (30) : The Leading Index and Interest Rates
2010-03-05KIM, Wan-Joong
목차
요약
A possible slowdown in the rise of the leading index is fueling expectations of declining interest rates in 2010
The monthly leading index (YoY), which has moved in tandem with government bond
rates, may slow due to a base effect, continuing weakness in the private sector, and uncertainty on domestic and external conditions. As a result, expectations for a decline in government bond rates are growing.
This report examines the possibility that the leading index and government bond rates
may be less correlated in 2010.
1. Lack of logical basis for correlation between the leading index and government bond
Considering the coincident/lagging characteristics of interest rates, there is little evidence that the leading index and the government bond rate move together.
The U.S., Japan, and the UK, have a long history of interest-rate focused monetary policy, and their leading indices and interest rates have not been closely correlated.
2. Past slowdowns in the leading index have signalled economic downturns and lower interest rates
In the past, slowdowns in the leading index have raised expectations for rate freezes or cuts. However, the current state of the economy and monetary policy suggest that rate hikes within this year are more likely.
3. Real interest rates could increase
Real interest rates were high in 2005, and since rate hikes aimed at taming inflation could slow the economy, interest rates declined gradually.
However, real interest rates are now declining due to rising prices following the ending of base effects in 2008, and the economic recovery and possibility of gradual price inflation are likely to drive up nominal interest rates.
4. Expected rate hikes may not be fully priced into market rates
When expectations of rate hikes grew in June and August of last year, government bond rates gradually rose, and expectations of rate hikes were priced into market rates.
However, 3-year government bond rates have fallen from 4.61% last year to 4.2%, which suggests that expected rate hikes are not currently fully reflected in market rates.
5. Fiscal crises overseas may drive up international and domestic interest rates
In addition to the recent European fiscal crisis, major countries such as the U.S., Japan, and the UK are running dangerously high fiscal deficits. As a result, their sovereign debt, which had been regarded as safe assets, may carry higher interest rates.
6. The strong dollar and contracting swap basis will limit foreign bond investment
Due to the recent European fiscal crisis, the Euro is depreciating and the dollar is
strengthening. This may result in an outflow of foreign investment funds involved in the carry trade.
Although foreign investors were net buyers of domestic bonds through early February,
the swap basis is continuing to contract, and as a result net purchase volume may weaken.
7. Declines in bond rates will be limited in 2010 due to high deposit rates
In H2 2009, over 20 trillion won flowed into bank time deposits ('09.7~11) with maturities under 1 year. In addition, a large portion of special deposits sold in January 2010 is likely to be short-term.
If deposits rates remain at a relatively high level, declines in bond rates will be limited.
In spite of the strong correlation seen between the leading index and interest rates
in the past, these two factors could diverge in 2010
In the past, the monthly leading index (YoY) moved in the same direction as government bond rates, and was a useful factor for forecasting interest rates. However, in 2010, in spite of the slowdown in the leading index, declines in government bond rates will be limited.
However, if the European fiscal crisis quickly becomes a Euro crisis or if global exit strategies are delayed due to a slowdown in the economy, market interest rates may decline.
The monthly leading index (YoY), which has moved in tandem with government bond
rates, may slow due to a base effect, continuing weakness in the private sector, and uncertainty on domestic and external conditions. As a result, expectations for a decline in government bond rates are growing.
This report examines the possibility that the leading index and government bond rates
may be less correlated in 2010.
1. Lack of logical basis for correlation between the leading index and government bond
Considering the coincident/lagging characteristics of interest rates, there is little evidence that the leading index and the government bond rate move together.
The U.S., Japan, and the UK, have a long history of interest-rate focused monetary policy, and their leading indices and interest rates have not been closely correlated.
2. Past slowdowns in the leading index have signalled economic downturns and lower interest rates
In the past, slowdowns in the leading index have raised expectations for rate freezes or cuts. However, the current state of the economy and monetary policy suggest that rate hikes within this year are more likely.
3. Real interest rates could increase
Real interest rates were high in 2005, and since rate hikes aimed at taming inflation could slow the economy, interest rates declined gradually.
However, real interest rates are now declining due to rising prices following the ending of base effects in 2008, and the economic recovery and possibility of gradual price inflation are likely to drive up nominal interest rates.
4. Expected rate hikes may not be fully priced into market rates
When expectations of rate hikes grew in June and August of last year, government bond rates gradually rose, and expectations of rate hikes were priced into market rates.
However, 3-year government bond rates have fallen from 4.61% last year to 4.2%, which suggests that expected rate hikes are not currently fully reflected in market rates.
5. Fiscal crises overseas may drive up international and domestic interest rates
In addition to the recent European fiscal crisis, major countries such as the U.S., Japan, and the UK are running dangerously high fiscal deficits. As a result, their sovereign debt, which had been regarded as safe assets, may carry higher interest rates.
6. The strong dollar and contracting swap basis will limit foreign bond investment
Due to the recent European fiscal crisis, the Euro is depreciating and the dollar is
strengthening. This may result in an outflow of foreign investment funds involved in the carry trade.
Although foreign investors were net buyers of domestic bonds through early February,
the swap basis is continuing to contract, and as a result net purchase volume may weaken.
7. Declines in bond rates will be limited in 2010 due to high deposit rates
In H2 2009, over 20 trillion won flowed into bank time deposits ('09.7~11) with maturities under 1 year. In addition, a large portion of special deposits sold in January 2010 is likely to be short-term.
If deposits rates remain at a relatively high level, declines in bond rates will be limited.
In spite of the strong correlation seen between the leading index and interest rates
in the past, these two factors could diverge in 2010
In the past, the monthly leading index (YoY) moved in the same direction as government bond rates, and was a useful factor for forecasting interest rates. However, in 2010, in spite of the slowdown in the leading index, declines in government bond rates will be limited.
However, if the European fiscal crisis quickly becomes a Euro crisis or if global exit strategies are delayed due to a slowdown in the economy, market interest rates may decline.