Below is a chart of the ten-year Treasury yield over the last three months. After peaking near 4% in April, it has since dropped to below 3% and currently yields for 2.97%. This is as abrupt a move as you are likely to see in long-term interest rates.
On the one hand, this is certainly a boon for mortgage rates which are at record lows, making the servicing of mortgage debt less expensive. However, the low rates are reflective of expected future interest rates – and to the degree they are low, this reflects bond market players’ concern about future economic growth.
Randall Forsyth points out that many economists are still pointing to higher yields despite this aggressive move to the downside.
Investors have contracted to lend to the U.S. government at returns so low as to be unimaginable just a few months ago. For instance, it was only three months ago that it was confidently asserted those returns had nowhere to go but up.
But on Monday, Treasury note and bond yields were knocking on psychologically important round numbers. The 10-year Treasury note hovered just above 3%, the lowest since late April of 2009. Meanwhile, the 30-year long bond was just above 4%, a level that hadn’t been revisited since early last October.
Further in the yield curve, the five-year note already had broken through the 2% barrier last week. The three-year note yielded only a bit more than 1%. And the two-year note — the Treasury maturity most sensitive to expectations about the future of short-term interest rates — traded at 0.63%, a trivial margin over the 0.60% low touched in the darkest days of the financial crisis in December 2008.
And yet, economists I polled for the Current Yield column in this week’s paper edition of Barron’s hewed to the current status quo. The Federal Reserve may lift its federal-funds target sometime in 2011 while the benchmark 10-year Treasury note yield may climb back to the high end of its recent range.
I think they are wrong. There is no inflation on the horizon in the United States. Wait until the helicopter drops and then you might get inflation. Right now, deflation reigns supreme.
I may have been early in saying sell equities to reinvest the money in gold or bonds or downside protection, but this view is being validated by the markets.