Introduction to European Fundamentals | Episode 15: About Long-Term Interest Rates [Mitsuko Matsuzaki]
Profile of Miiko Matsuzaki
Yoshiko Matsuzaki. Began her career as a trader at UBS Tokyo. She moved to the UK in 1988, and in 1989 joined the London headquarters of Barclays Bank in the Dealing Room. She gave birth in 1991. In 1997 she transferred to Merrill Lynch Investment Bank in London’s City, and left in 2000. Currently, in addition to FX trading, she provides information sourced straight from Europe to Japanese individual investors through blogs, seminars, and YouTube. Her books include “Miiko Matsuzaki’s London FX” and “Always Profitable London FX” (both published by Jiyu Kokuminsha). Since 2018, she has run the “Fundamentals College.” She also started an online salon on FX trading with DMM.com.
Blog:http://londonfx.blog102.fc2.com/
Fundamentals College:https://fundamentals-college.com/
Online Salon:https://lounge.dmm.com/detail/1215/
*This article is a reprint/edited version of an article from FX攻略.com, December 2020 issue. Please note that the market information written in the main text may differ from current market conditions.
Long-term interest rates determined by the market
Central banks are tasked with “maintaining price stability,” adjusting policy rates up or down to ensure stability. However, the interest rates you need to watch when trading currencies are not only the central bank policy rates. Another important rate is the yield on government bonds issued by a country, commonly known as “long-term interest rates.”
Policy rates can be controlled by the central bank, but long-term rates are determined by the buyers of that country’s government bonds and by other central banks that purchase them as part of their foreign exchange reserves. In other words, long-term rates are like a popularity vote for each country’s bonds; bonds of countries with solid economic and fiscal management and strong repayment ability attract many buyers. Conversely, bonds of countries with questionable repayment capacity attract little interest.
Long-term yields are thus determined by the perceived creditworthiness and repayment ability. Therefore, if a country is deemed to have repayment ability, it can borrow without paying very high interest. Conversely, countries whose future economy or finances are uncertain or at risk of default must offer attractive high interest to attract buyers.
Thus, bond yields (long-term rates) are not something even central banks can control; they are ultimately determined by market supply and demand. Like the policy rate set by central banks, the long-term rate determined by the market also influences exchange rates.
Policy rates are decided by the Monetary Policy Committee of the central bank, meaning they do not change daily; changes occur when a policy meeting is held. In contrast, long-term rates are determined by a comprehensive assessment of future economic growth expectations and ratings, so their level can change multiple times in a day.
