By Zach Pandl, Portfolio Manager and Strategist
The big surprise in bond markets this year has been the low level of long-maturity rates despite continued economic growth. To see these changes most clearly, it is often best to focus on distant forward rates, such as a five yield, five years forward ("5y5y"). After a big increase in 2013, these forward rates have declined across a diverse set of countries year-to-date (Exhibit 1). This comovement should come as no surprise: changes in forward rates are always highly correlated across countries. And we can use these cross-country relationships to shed some light on today's low bond yields.
Exhibit 1: Cumulative change in 5y5y yields since December 2012
There's a well-known relationship between nominal growth and forward interest rates, which holds in both theory and practice. Countries with higher nominal growth expectations tend to have higher forward rates and vice versa (Exhibit 2).