Why Waning Foreign Risk Appetite Could Spell Trouble For Stocks

Why Waning Foreign Risk Appetite Could Spell Trouble For Stocks

One of the main drivers of foreign risk appetite in U.S. financial assets has been the enormous and growing differential between risk-free yields available here versus those overseas. Over the past decade, U.S. interest rates have moved far higher than those in Germany, making owning financial assets based in the U.S. far more attractive to foreign investors.

During this period the correlation between the S&P 500 and the spread on U.S. and German 10-year yields was fully 95%. So U.S. stocks have likely benefitted a great deal from money flowing into our markets looking to escape negative interest rates overseas.

However, over the past year, the differential between U.S. and German yields has been narrowing, making it far less attractive for overseas investors to take the currency risk associated with buying assets here in the U.S. In fact, the spread between the two 10-year rates has now fallen to a multi-year low which should be a negative for foreign risk taking in domestic assets like stocks and bonds.

Why Waning Foreign Risk Appetite Could Spell Trouble For Stocks

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