U.S. real interest rates soar... Countdown to the Great Transfer of Funds

 

The US interest rate adjusted for inflation is 1.95% per year... best in 16 years

It is overwhelmingly higher than Korea 0%, Europe -2.1%, Japan -2.9%

Funds flow to the US, triggering a strong dollar… Fluctuations in the financial and foreign exchange markets

The real interest rate in the US is not only higher than in the past, but also overwhelmingly higher than in major countries and regions such as Korea, Europe and Japan. In particular, as the US Federal Reserve (Fed) is announcing an additional interest rate hike at the end of this month, volatility in the global financial and foreign exchange markets is expected to increase further. According to the financial sector on the 7th, the real interest rate announced periodically by the US Federal Reserve recorded 1.95% per year. The real interest rate is the value obtained by subtracting the expected inflation rate (3.3%) from the base rate (5.25%).

This is the highest level in 16 years since August 2007 (2.05%). When the one-year U.S. Treasury yield (5.476% per year) was applied instead of the standard rate, the real interest rate was higher at 2.176% per year. The expected inflation rate is a study conducted by the University of Michigan in the United States, and it is how people predict how much the price will rise in the next year. If expectations come true and people invest 100 million won in US Treasury bonds, after a year, real income of more than 120 million won will be confirmed regardless of price fluctuations.

On the same day, the U.S. two-year Treasury bond yield also recorded an annual 5.12 percent during the intraday, the highest since July 2007.

When it was announced that the number of new private jobs in June was 497,000, doubling the market expectation, market interest rates soared as the possibility of an additional base rate hike increased.

A surge in real interest rates tends to lead people to save rather than consume. If you save now, you can earn more real income a year later. Companies use the real interest rate indicator as an opportunity cost when investing. As a result, when the real interest rate rises, the opportunity cost of investment also increases, which acts as a factor that shrinks investment. The US is currently experiencing good employment and economic trends. However, there are also projections that additional interest rate hikes and subsequent real interest rate surges will lead to a downturn in the economy by shrinking consumption and investment.

Rising real interest rates make investing in products that pay fixed rates, such as bonds, attractive. This is because investing in bonds provides a substantially guaranteed income compared to other assets. Also, if interest rates fall in the future, capital gains are possible. For this reason, a rise in real interest rates acts as a factor in shifting money in the market from stocks to bonds.

It is also expected that the movement of funds between countries will be triggered. The real interest rate in the US is about 4 percentage points higher than in Europe, so if you invest in US bonds, you can raise a real rate of return 4 percentage points higher than in Europe. Korea's real interest rate difference with the United States is 1.95 percentage points, which is higher than the interest rate difference (1.75 percentage points) calculated using the base rates of the two countries.

Such a difference in real interest rates can trigger the flow of foreign investment funds to the US, which can lead to a drop in the value of the won and market instability in the foreign exchange market. However, as Korea's real interest rate is higher than Japan's, it is showing strength compared to the yen. This year, the won has fallen 3% compared to the US dollar, but has risen about 4% against the Japanese yen.