OpenMarkets Weekly: Why Are 10-Year Yields So Low?

Summary

• Safety and a search for yield among factors driving Treasury markets.
• As stock markets became volatile in late February and early March, investors made a move toward U.S. Treasuries.
• The result has been record low yields for the U.S. 10-year Treasury note, which reached below the one percent mark for the first time.

By OpenMarkets

At A Glance

• Safety and a search for yield among factors driving Treasury markets.

As stock markets became volatile in late February and early March, investors made a move toward U.S. Treasuries. The result has been record low yields for the U.S. 10-year Treasury note, which reached below the one percent mark for the first time.

Jack Bouroudjian examines the factors driving declining yields, focusing on four areas:

• The safety trade
• Federal Reserve action
• Disinflationary pressure
• The search for yield

Central bank action across the globe, matched a lack of inflation has led to a long-term decline in the U.S. 10-year yield, Jack points out. Perhaps the greatest factor driving the recent action in Treasuries, he says, is the search for a return.

"Whether it be a virus, a slowdown of growth or another 'black swan' event, US Treasuries are a perceived safe haven. When capital needs a home, capital goes to where it is treated the best. For global capital, that home is often the U.S. Treasury markets."

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Original post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Comments

[katmandu100]

Interesting commentary.

[Salmo trutta]

B.S. Real interest rates are low, and will go lower, because the Fed manufactures money products, e.g., M1 and M2, etc., instead of savings' products (money substitutes). Then the Fed "washes out" interbank demand deposits by remunerating IBDDs. The interest rate arbitrage is through the banks instead of the nonbanks.

[SayItWithLyrics]

There are two questions

1) Why are govt bond yields so low, and in such a steep decline for decades?
2) Why was there a jump down in yields in the last week or two?

The 2nd question is the obvious one -- a classic "flight to safety" in a somewhat panicked equity market. Textbook stuff.

But the 1st question is the important one. There is a global glut of money, interest rates are the price of money, so when supply increases faster than demand, the price goes down. Most of that money glut is coming from govt deficits and central banks (some would argue it is "all" instead of "most", but it doesn't really matter).

But that is only half the answer. The other half is that technology (including its sister, globalization) is driving down input costs. So to those who ask "Why isn't there inflation if there is all this excess money?", I would answer "There is, but it is offset by the deflationary pressures of technology".

As long as there is a reasonable balance between the impact of money supply growth and the deflationary impact of inflation, this rather tenuous equilibrium can continue. The problem will come when govts / central banks (they are becoming undifferentiable) get overzealous and "out-print" technology, and / or when they get overzealous in their desire for control and end up slowing technology down. History says that govts getting over-zealous in spending other people's money and in their reach for power are as certain as death and taxes. Let's just hope that line doesn't get crossed until later instead of sooner.