Are newly cautious U.S. consumers behind the world's low interest rates?
Though U.S. household debt rose 0.9% to $13.7 trillion at the end of Q1 (vs. previous quarter),1 that’s somewhat of a departure from the trend that's generally prevailed since the trauma of the 2008-9 global financial crisis.
As far back as the 1960s, household debt grew at roughly 10% per year, propelling one of the world’s longest-running global economic success stories. But the 2008-9 crisis drove households to deleverage drastically, decreasing their borrowing by as much as -8.2% year-over-year, a post-World War II record, before returning to generally positive territory two to four years afterward.
But since 2008, the growth rate has stayed mostly below 5%; at the end of 2018, the rate was still a relatively subdued 2.9%. If this decade-long trend continues, the impact could ripple through the rest of the world’s economy.
One key effect of the reduced borrowing may have been to encourage record low interest rates, both in the U.S. and elsewhere, as lenders attempted to reignite the borrowing cycle. while a slowdown in debt issuance drove up bond prices, pushing yields downward.
A second effect: downward pressure on growth rates among U.S. suppliers, including China. While China’s rapid expansion has been supported by record borrowing, that debt burden itself has created issues in some corners of its economy.
Growth Rate of U.S. Household Debt, 1961-2018
Chart courtesy of Brandywine Global. Source: Bloomberg, Data as of 12/31/2018. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.
Brandywine Global’s Francis Scotland describes the newly cautious U.S. consumer as heralding the end of a global credit supercycle, which would require a new borrower of first resort in order to shift the balance of growth forward worldwide.
In the meantime, the recovery of U.S. consumers’ balance sheets could be viewed as a net positive from an individual point of view, providing the potential for renewed spending when conditions permit.
On the rise: China 10-year bonds
The rise in the prices of China’s government bonds – and the corresponding fall in yields from 3.44% on April 19 to as low as 3.26% on May 14 – can be seen as good news for the wrong reason. The current round of trade trauma has generated volatility in many of the world’s major markets.
But markets have been quick to adjust to the amped-up news flow of recent days. Some say it’s a sign of longer-term news fatigue, with each escalation of events, be it geopolitical or financial, falling on increasingly desensitized ears.
In the case of China’s bonds, however, it’s possible to interpret the falling yields as a flight to quality among local-currency bond investors, seeking refuge from flagging corporate credit quality in the stronger creditworthiness of the central government.
On the slide: Chinese yuan
The daily value of China’s currency is determined by the Peoples Bank of China on a daily basis according to the market forces acting on a basket of currencies. Nevertheless, its value is often measured against the U.S. dollar. The current bout of trade tensions between the U.S. and China have had an impact on the currency, which has fallen from a recent high of 6.686 to the U.S. dollar on April 17 to as low as 6.885. a change of some 3%. The “offshore” yuan, traded in Hong Kong, has fallen to as low as 6.991 to the dollar during the same timespan.
Both China and the U.S. have forsworn the use of currency as a trade weapon. But currency market forces appear to be following the lead of the turmoil in tariffs between the two parties so far.
1 Source, New York Fed via Bloomberg, May 14, 2019
All data Source: Bloomberg as of May 14, 2019 unless otherwise specified.