U.S. Government 10-Year Note Drops Below 1%: What It Says About The Economy
Summary
- The yield on the 10-year US Treasury note dropped below 1.00 percent for the first time in history.
- The Federal Reserve lowered its policy rate of interest, but investors appeared to interpret this move as economic conditions being worse than had been thought.
- Consequently, even more money flowed into the government bond market as the US stock market took another major hit indicating that expectations have become more dismal.
At ten o’clock Tuesday morning, March 3, 2020, the Federal Reserve announced it was cutting its policy rate of interest by 50 basis points.
Within a very short time, the yield on the 10-year US Government note dropped below 1.00 percent, a new historical low.
On Monday, all three major US stock indexes registered substantial gains after five days of large declines.
The reason for yesterday’s gains, according to many analysts, was that investors expected that the Federal Reserve and other central banks would soon cut their policy rates of interest in an effort to stem falling stock markets around the world that were reacting to the spread of the coronavirus and the global economic slowdown it was causing.
Well, on Tuesday, the Federal Reserve acted and the stock market dropped!
Whoa! It wasn’t supposed to act that way!
WHAT CHANGED?
The question has to be, what changed between Monday and Tuesday?
Let’s take a guess. My guess is that investors believed these moves would not come immediately. Because there had been a lot of talk that the Federal Reserve and other central banks would lower interest rates, the feeling was that they would not act immediately.
Thus, the move by the Federal Reserve surprised investors. Things must be worse than was thought.
Investors concluded that if the Federal Reserve felt it had to move as fast as it did, that things must be a lot worse than the investors had thought they were.
That is, the Fed’s move broke the market’s expectations about when a Fed move might be made. The investors, therefore, had to react.
US stocks declined on Tuesday, and not by just a little bit.
THE ECONOMY IS WORSE OFF THAN EXPECTED?
Up to now, the projections for the US economy presented by the Federal Reserve System seemed to be very reasonable. I used them on a regular basis because I believed that they were the most reasonable forecasts around.
Federal Reserve officials saw US economic growth coming in at 2.0 percent in 2020. The rate of growth dropped in 2021 to 1.9 percent and then fell to 1.8 percent in 2022. These rates of growth were not that robust, but relative to the rest of the world and given the fact that the unemployment rate in the United States was at a fifty year low, analysts seemed to feel that things were alright.
It was also the case that some economists, including myself, believed that the current way to measure the health of the US economy understated the actual health of the US economy. One major argument along these lines has been that businesses cannot find workers, especially smaller businesses were coming up short, when it came to filling job needs.
But, now, the Organization for Economic Cooperation and Development has put out new forecasts that have caught a lot of people’s eyes. The OECD now has put out a picture of the US economy producing a negative growth rate in the second quarter followed by a recession, possibly coming by the end of the year.
Investors have apparently taken the Federal Reserve action as a confirmation that the Fed now believes that US economic growth may be more toward the OECD outlook than its former position.
A SUPPLY SIDE SLOWDOWN
Can the Federal Reserve overcome the picture drawn by the OECD? Can it stop a recession from occurring?
The problem is that the economic slowdown connected with the spread of the coronavirus is a supply side phenomenon. Monetary policy can do very little to offset a supply side contraction.
So, if we have an economic slowdown and if the Federal Reserve can do very little to combat this supply side slowdown, it appears, and this seems to be what the bond market is saying, that things are going to get worse, economically. The only thing the Federal Reserve can do is prevent a cumulative financial disruption.
Therefore, economic growth is slowing, and, along with this, expectations for inflation are also being reduced.
AND WHAT ABOUT INFLATION
Nominal bond yields are often separated into two components, expectations for the real growth of the economy and expectations about future inflation. I often analyze bond yields in this way.
To have the yield on the 10-year US Treasury note drop below 1.00 percent, says a lot about what investors in the bond market are thinking.
Inflationary expectations built into the 10-year Treasury note have dropped into the 1.50 percent to 1.60 percent range. This is after the range has remained in the 1.70 percent to 1.80 percent range for the past several months. Up to now, this expectation has remained relatively steady, indicating that investors expected future inflation to remain somewhere near 2.00 percent, the target objective of the Federal Reserve.
The numbers for the expected real growth rate for the US economy have been distorted because of the massive flow of “risk averse” monies flowing into the United States as international investors saw the US as a “safe haven” for their funds.
So, the important thing here, for me, is the fact that inflationary expectations have taken such a hit in the past week or so. This movement indicates to me that investors now believe that the Federal Reserve cannot really stop an economic slowdown. All the Fed can do is try and keep financial markets calm.
IS THIS THE END OF THE EXPANSION?
Investor expectations have changed! Investors have seemingly built into their expectations a recession and a falling inflation rate. Even though the yield on the 10-year Treasury note ended the day just above 1.00 percent, I believe that the warning is out there and others, businesses, consumers, and other investors, need to pay attention.
This article was written by
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Comments (18)
the US job market is limiting growth in GDP, this is the fault of massive failure of our union run public school system, its been indoctrinating propaganda for decades, instead of teaching math, science and technology, hence decimating US middle class.
The contributions are that, gifts. No worker has rights to what they contributed, as it is government property. In other words, they can do what they want with it. The SSN card is government property, it is a fictional entity, just like a corporation, or an LLC. Who's responsible for babysitting the entity, you @ding dong, and the entity's name is called DING DONG, which happens to have the same letters but is NOT you. How about taxes? Well, yes, they are gifts ;)
