Global Integration and the Forecasting of Interest Rates

Takeshi Kobayashi
Professor, NUCB Business School

The globalization process has a significant impact on international bond markets. The increasing capital flow to Asia plays a crucial role in the convergence of bond yields in local currencies. Long-term interest rates are influenced not only by country-specific factors, such as monetary policy trends, but also by global factors, including rising global inflation. This research aims to identify how financial integration affects the yield curves of Asian countries and examines whether common factors reflecting investors’ outlook on the international bond market can help predict future interest rates.

To achieve this, I decompose Asian local currency yield curves into global, regional, and local factors and analyze their impact on future yield curves. The results show that the global level factor explains, on average, 50% of the variation in the level factors of Asian countries, while the degree of regional influence varies across these countries. Furthermore, a sub-sample analysis reveals that the significance of global level and regional slope factors increases notably after the global financial crisis. Finally, I confirm that decomposing yield curves into global and regional factors enhances the predictive power for future yield curves.

This approach could provide policymakers, bond investors, and corporate managers with a new tool for predicting interest rates and monitoring macroeconomic trends.

Reference

Kobayashi, T. (2021). Common Factors in the Term Structure of Credit Spreads and Predicting the Macroeconomy in Japan. International Journal of Financial Studies, 9(2), 23.