Treasury Yields Update: Heading Lower?

Includes: AGG, TLT
by: Doug Short

I've updated the charts below through Thursday's close. The S&P 500 is now 6.02% off its interim high set on September 14th, the day after QE3 was announced. The 10-year note closed today at 1.62, which is 26 basis points off its interim high of 1.88, also set the day after QE3 was announced. The historic closing low was 1.43 on July 25th. Many market analysts have speculated that the rise in yields from the July low was the opening move in an epic reversal of the multi-decade trend toward lower yields from stagflation era, when the 10-year peaked above 15 percent (more here).

Perhaps it's too soon to make that call. If the post-election sell-off in equities continues, the 10-year yield could certainly revisit the levels of late July. Japan is an example (admittedly an extreme one) of a developed nation with its own currency that has experienced a relentless demand for government bonds, as this chart illustrates. Currently Japan's 10-year yield is around 0.75, less than half that if its US counterpart.

As for mortgage rates, the latest Freddie Mac weekly update, out yesterday, shows the 30-year fixed at 3.40%, four basis points above its historic low set the first week in October.

Here is a snapshot of selected yields and the 30-year fixed mortgage one week after the Fed announced its latest round of Quantitative Easing.

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The 30-year fixed mortgage at the current level no doubt suits the Fed just fine, and the low yields have certainly reduced the pain of Uncle Sam's interest payments on Treasuries (although the yields are up from their recent historic lows). But, as for loans to small businesses, the Fed strategy continues to be a solution to a non-problem. Here's a snippet from the latest NFIB Small Business Economic Trends report:

Thirty-one (31) percent of all owners reported borrowing on a regular basis, up 1 point from August. Eight percent of owners reported that all their credit needs were not met, also up 1 point. Thirty-two (32) percent reported all credit needs met, and 50% explicitly said they did not want a loan. Only 2% reported that financing was their top business problem ...

A Perspective on Yields Since 2007

The first chart shows the daily performance of several Treasuries and the Fed Funds Rate (NYSEARCA:FFR) since 2007. The source for the yields is the Daily Treasury Yield Curve Rates from the U.S. Department of the Treasury and the New York Fed's website for the FFR.

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Now let's see the 10-year against the S&P 500 with some notes on Fed intervention.

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For a long-term view of weekly Treasury yields, also focusing on the 10-year, see my "Treasury Yields in Perspective."