Interest Rates and the Renminbi Revaluation

Last week when the Chinese central bank first announced that they were going to change the value of their currency against the dollar, I suggested that one of the interesting things to keep an eye on would be long-term interest rates in the US.

It turns out that long-term US interest rates did indeed bump up on the day of the announcement, by about 11 or 12 basis points… only to fall much of the way back down the next day. As of now, long-term interest rates in the US are very little changed from where they were a week ago. Apparently the renminbi news had no substantial effect on US interest rates.

But that’s not the whole story.

Why do I say that? Because while rates didn’t rise much in the US as a result of the renminbi revaluation, interest rates in most other countries fell, in most cases quite substantially. The following table shows the difference between long-term (10-year government bond) interest rates in the US and in several other major developed countries last week. The table suggests that the Chinese revaluation, which happened on the 21st, apparently had a significant effect on the interest rate differentials between the US and other countries.

Note: Negative numbers signify interest rates that are lower than US rates.
Source: Financial Times.

In other words, while US interest rates didn’t rise much in absolute terms, the news from China did cause them to rise substantially relative to the rest of the world. I would argue that this is evidence that China’s exchange rate policy is indeed having noticeable effects on domestic US interest rates – just not in the most obvious ways that we might have expected.

Much more on this in my next post…

Kash