Financial Soundness Gauge
Wall Street Journal and MarketWatch data; links below
Global investors demand higher interest rates the less they trust a nation to repay its debts.
The above Gauge tracks how much higher interest rates investors are demanding relative to Japan,
the world’s most trusted debtor nation for decades (due especially to the highest savings rate by far):
The higher interest rates on a nation’s bonds rise, the LOWER investors judge its creditworthiness.
As evident in the above graph:
Since rating US debt second-best compared to Japan prior to 2012, investors have shunned it ever more:
US Treasuries are now trusted less than Europe’s riskiest nations: PIIGS¹ – only Portugal rates slightly worse.
¹Bankrupt Greece is off the chart, of course.
But even more damning: The above gauge greatly understates how low investors rate the US:
they have virtually shunned taking on any more US debt since 2010 (net overall),
hence, the Federal Reserve had to become dreaded Lender of Last Resort (see below graph):
Without the Fed continually intervening in the Treasury market globally,
God only knows how catastrophically high US interest rates would have soared by now,
as they will as the wheels continue coming off by multiple times the most bankrupt nation ever.
Click for explanation and discussion of the above chart.
Also see the “Points Relevant..” below for additional reasons investors actually view
US’ soundness falling much worse than the Gauge indicates.
The Financial Soundness Gauge is derived from the differences between the natural logarithms (nL)¹
of the rates on Japan’s 10-yr notes and those of other nations.
The rate on 10-yr loans* is the primary indicator bond investors employ to gauge financial market conditions.
*bonds / notes
¹A logarithmic scale accurately represents percentage changes in values,
hence also reveals comparable differences in magnitude.
Points Relevant to Interpreting the Gauge
The Gauge is most useful for comparing relative soundness at a single point in time, since it moves less in relationship to overall bond market conditions, due to Japan’s rate determining its constant benchmark level.
The difference or “spread” between different rates, however, does tend to move with bond rates’ overall trend, whether up or down, but any such relative move is attenuated by however much Japan’s rate moves, for the reason stated above.
Most nations trending higher since 2012 thus reflects investors shifting out of riskier assets like stocks into less risky bonds, but, again: the magnitude of this move is muted in the Gauge.
Hence, as mentioned:
US Treasuries falling sharply into less trusted Gauge readings despite a global move into bonds shifting most readings upward thus broadcasts an all-the-more loudly blaring alarm how much global investors are fleeing/shunning Uncle Shame’s debt / Treasuries.
The Gauge also does not reflect how much the US Treasury must pay higher coupon rates,
twice to five times sounder nations’ rates, as The WSJ reveals at this link:
11 Sep rates are below (“YIELD”), per The Wall Street Journal (click link for current and past years quotes)
The greater the red bar in below graph, the worse investors trust US Treasuries in comparison.
Here are five-year charts of 10-yr rates courtesy of MarketWatch
click a chart for source page