Global View April 2015: How China Sets World Interest Rates (Part III)

 This report argues that US bonds are vulnerable to a sell-off, but strangely this threat emanates from Beijing not Washington. The critical role of bond term premia, following the exhaustion of secular downtrends in real interest rates and inflation expectations, makes liquidity a key factor to watch. Liquidity drives bond term premia pro-cyclically, but, with China’s PBoC now one-fifth bigger than the Fed, the fact that the Chinese Central Bank is now easing and the US Fed is still pondering a rate hike matters. Honey, who stole our interest rates…?