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Global Savings Glut II Leaves Risk Rally Prone to Reverse

It’s been almost a decade since Ben S. Bernanke pointed to a global savings glut to explain low interest rates.

One financial crisis and a global recession later, the glut lives on. The currency reserves of developing nations swelled to $11.9 trillion from $6.9 trillion in 2008, led by a $2 trillion boost in China.

That has helped absorb bond sales of rich nations, helping send average 10-year yields on Group of Seven government bonds to about 2.5 percent from 15 percent at the start of the 1980s.

To Stephen L. Jen and Joana Freire, economists at SLJ Macro Partners LLP, a London-based hedge fund, rates are too low and vulnerable to a reversal. They suspect emerging markets aren’t solely responsible for what they call the Global Savings Glut II.

Instead, they see a turnaround in corporate investment spending as a powerful enough force to push interest rates higher by running down savings. That would upend the recent lull in financial markets, especially if rates return to moving roughly in line with economic growth rather than undershooting it as now and in the mid-2000s.

“The levels of the real interest rates seem too low, in our view, and the pent-up pressures for interest rates to rise will increase as the global economy gradually recovers,” they wrote in a July 9 report. “A comprehensive risk-repricing triggered by higher interest rates is likely at some point.”

The worry recalls the last episode a normalizing of rates, which they say contributed to the collapse in the U.S. housing market and subsequent financial panic. While Jen and Freire don’t predict a global crisis this time, it won’t take much of a move to throttle markets.

“Risk assets could be vulnerable to a significant correction, ironically as the global economy recovers and necessitates the central banks to normalize their extreme monetary policies,” they conclude.

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