The 10-year Treasury bill (^TNX) is bouncing back off recent lows as worries over a global slowdown and a fight over China’s yuan start to ease. But don’t expect interest rates to rise much further in this environment, says former Federal Reserve insider Vincent Reinhart. In fact, the U.S. economy could soon look a lot more like Japan’s.
“In an environment in which the market’s not growing, it’s hard to see where capital gets a return,” Reinhart, the chief economist and macro strategist at Mellon, told Yahoo Finance’s The First Trade. “We have $15 trillion of sovereign debt around the world trading at negative rates, that’s pretty compelling. If you have that many alternatives that look so unattractive, it means capital is coming into the U.S. and pulling down our rates.”
He draws comparisons to the economic slowdown that’s been gripping Japan for decades. Yields on 10-year bonds there fell as low as -0.215% earlier this week as foreign investors searched for safety amid a market slide. In general, central bankers in Tokyo have been trying to keep yields as close to zero as possible as it tries to jolt the economy.
“Japan’s probably performing better than the press it’s getting,” Reinhart, a former economist at the Federal Reserve, said. “When you look across the G7 economies, only one of the seven has seen inflation go up in the last five years, and only a couple have seen GDP per capita go up, and that’s Japan.”
Reinhart has praise for Bank of Japan’s leader, Haruhiko Kuroda, saying his “quantitative easing really has taken some hold.”
But Japan’s “population is declining and it’s not generating much productivity, so there aren’t many opportunities for return,” he said.
The U.S. isn’t yet seeing a population decline, but the latest Census figures show population growth last year fell to its lowest level since 1937. Productivity remains strong, coming in at 3.4% in the first quarter of 2019, according to the Bureau of Labor Statistics.
Still, Reinhart says the demographic shifts in the U.S. signal a Japan-like economic environment “seems to be where the U.S. is headed.”