Brooks: The Rise in Long-Term Interest Rates is Due to Fiscal Deficits and Government Debt

The main reason for the rise in long-term interest rates has been attributed more to fiscal deficits and government debt than to monetary policy. Robin Brooks, former foreign exchange analyst at Goldman Sachs, pointed out in his blog that the fiscal policies of major countries have deviated from normal levels since the COVID-19 pandemic. He stated that market patience is reaching its limits in the context of high government debt. Brooks explained that while short-term interest rates reflect expectations of monetary policy, long-term rates are more significantly influenced by risk premiums and term premiums. He noted that the recent movements in long-term interest rates are driven more by rising risk premiums than by expectations of monetary policy. The '10y10y forward rate', which refers to the 10-year yield ten years from now, has been rising globally, particularly in countries with high debt and significant political dysfunction. Japan's 10y10y forward rate has seen the largest increase in the past ten days, followed by the UK, France, and Italy. Brooks analyzed that the U.S. Treasury market also influences long-term rates in other countries, explaining that the bear steepening phenomenon is pushing long-term rates higher. He mentioned that the rise in long-term rates began in 2022 alongside central banks' responses to COVID-19 inflation, but recently, long-term rates have been rising independently. Brooks emphasized the urgency for policymakers to control fiscal policy.

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