Since I discussed these issues in March 2005, real interest rates have reversed some of their previous declines. For example, in the United States, real yields on inflation-indexed government debt averaged 2.3 percent in 2006 as compared with 1.85 percent in 2004. In the past few weeks, that yield has averaged about 2.4 percent. Inflation-adjusted yields in other industrial countries have also started to move back up after falling in 2005.8
How does this all fit together? My reading of recent developments is that although some of the details have changed, the fundamental elements of the global saving glut remain in place. ..
Further increases in net capital flows from the developing economies, all else being equal, should have further depressed real interest rates around the world. But as I have noted, in the past few years, real interest rates have moved up a bit. This increase does not imply that the global saving glut has dissipated. However, it does suggest that, at the margin, desired investment net of desired saving must have risen in the industrial countries enough to offset any increase in desired saving by emerging-market countries...
Once again, however, I do not want to rely exclusively on this line of explanation for the behavior of long-term real interest rates, as other factors have no doubt been relevant. In particular, term premiums appear recently to have risen from what may have been unsustainably low levels, in part because of the greater recent volatility in financial markets and investors' demands for increased compensation for risk-taking.