Chart of the day


For some perspective on all-important long-term interest rates, today’s chart illustrates the 112-year trend of the 10-year Treasury bond yield (thick blue line). As concerns over government debt as well as a struggling global economy have increased and fears over inflation diminished, investors have moved towards safety resulting in a significant decline of the 10-year Treasury bond yield. The 10-year yield has declined a fairly dramatic 300+ basis points (i.e. 3%) since the peak of the credit bubble. This decline has brought the 10-year Treasury bond yield to a 112-year monthly low. It is worth noting, however, that the quarter-century downtrend of the 10-year bond yield remains intact and will remain intact even if the 10-year yield were to drop significantly below 1.5% over the near-term.

5 thoughts on “Chart of the day

  1. I would atribute the low yield rate to the massive increase in T-bills demand coming from Asia and Latin America. Let’s not forget that after the Assian crysis many countries started to create buffers and pilled up large amounts of cash. The cash came from undervalued currencies leading to trade surpluses. And what safer way to keep your money than american bonds, safe and very liquid compared to other instruments.
    And with the euro crysis on front pages it is highly unlikely to see the trend you mentioned reversed.

    Oh, and let’s not forget, at the curent yield, real interest rates are close to zero if not negative.

    1. I agree, there are a lot of fund flows into US Treasuries from foreign investors, although the current levels are the lowest since 2007. I would say that the decline of yields is mainly the aftermath of QE2. Also, the data regarding large speculative net long position in 10y T-note futures as percentage of total open interest show us a kind of crowded trades. Large speculators means hedge funds and in 2011 we know that the 10y T-note was the favourite asset of hedge fund managers, except Bill Gross (poor Bill 🙂 ).
      The expectations for 2012 indicate that the yields will continue to trend lower. However, there could be some scenarios for higher yields. It is difficult to say what scenario has more chances to emerge, but I think that a strongly improvement in US economy and a recovery in risk appetite would be the most appropriately scenario. In other case, if economy continues to suffer, the FED’s QE3 bazooka will bring on more pressure on yields. Finally, I dont think that a worsening in US sovereign credit ratings would cause a rise on yields. Even though US faces another downgrade, considering the global environment, I am sure that worldwide investors will continue to assign to US debt the lowest probability to default.

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