Review the attached pictures and answer the following questions: (Do not attempt

Question

Review the attached pictures and answer the following questions: (Do not attempt if you can not answer all!!!)

2) Locate the Comparable Treasuries on the upper right side of the picture. How does the 10 year US treasury rate compare with those of the European Central Bank and the Japan Central Bank? What is the one year rate and ten-year rate for Europe and Japan? Why do you think these rates are different from the US?

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Explanation / Answer

1) The graph shows a decline in 10-year treasury rate compared to an year ago. The 10-year rate is a close indicator of how the economy has been performing and also builds the future expectation of the same.

More specifically, it is an indicator of expected growth and inflation. The substantial decline in this rate suggests a problem known as stagflation which implies stagnant growth along-with inflation. The U.S economy seems to have been impacted by an economic slowdown which resulted in lower growth expectation while inflation continues to remain a cause of worry resulting in lower 10-year rates.

2) One year & Ten-year interest rates in Europe are close to -0.25 % and 0.4% respectively while they are close to -0.1% and 0% in Japan for the same.

Interest rates in these economies are much lower than that in U.S because of a severe problem of deflation i.e. negative inflation in Japan and Europe. Thus, rates offered are close to 0 as the purchasing power is significantly eroded by negative inflation. The real rate defined as nominal rate minus inflation would actually be higher in such economies.

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