Thursday, June 1, 2017

Government bond yields and trade

Most discussions of trade imbalances focus on the desirability of the goods that a country produces. Countries with trade surpluses are believed to be those that produce highly desirable goods.

However, trade imbalances are linked to capital flows. What if it is the demand for capital flows that drives the trade deficit, rather than the other way around? Capital flows from regions of surplus, where interest rates are low, to regions where interest rates are higher.  Government bond yields provide a measure of the demand for capital.

The chart below provides some evidence for this point of view. It shows that trade surplus countries tend to be countries where government bond yields are very low, indicating a surplus of capital.

The lowest bond yields are in Switzerland and Germany , while the highest are in Australia, Italy and the US.

Data note:  Government bond yields are for the 10 year bond on 5/31/2017. The data are from the Bloomberg or Trading Economics website.  The current account balance data is from the OECD stats website.