As this vast pool of savings flows into capital markets, interest rates around the world fall. That means that institutions like universities that use the return on their endowments to fund their activities will need to tighten their belts. Stimulus check update: $600 checks will hit some bank accounts Tuesday night, says the Treasury. Bond traders are a lot like a dog on a 30 foot leash. The traders can run the leash out ahead of the owner and from side to side, but they don’t want to get too far away or they risk getting choked. On Jan. 3, … Inflation and the Constantly Low Yield Environment Bond yields are based on expectations of inflation, economic growth, default probabilities, and duration. Why Treasury Yields Matter. So when the Fed repeats, on a monthly basis, that yields will be “exceptionally low through at least 2014” then the message is clear – “we think the economy is exceptionally weak and we expect to keep rates low for several years”. ratio, as the United States did after World War II, might not be an option. (Source: Bloomberg) Wider economic factors. The Fed aims to set interest rates at levels that will produce full employment and stable prices. Interest rates have fallen rapidly, to the point where many in the market believe the benchmark 10-year Treasury yield, which impacts mortgage rates, could fall below 2%. Bond traders aren’t an overly complex group of people. As U.S. Treasuries hit historic lows, real yields have gone below zero. Some answers are clear, but many more are elusive. This, in itself, is an absolute financial contradiction. She speaks on "Bottom Line." From a bond traders perspective that means one thing – yields aren’t going to surge because the economy will remain weak and even if the economy strengthens marginally the Fed has been very clear that they’re going to play it on the safe side and keep rates low for several more years. I often use the analogy of a dog on a leash. Treasury notes are market traded and in 2020, … They don’t like to lose money because they get fired when they lose money. Some thoughts: Finance. In September 1981, the 10-year Treasury note yielded over 15 percent. Of course, the Fed’s not doing that, but this doesn’t mean their communications are not highly effective. For much the same reason, public and private pension plans are probably more underfunded than current estimates suggest. Though the 10-year Treasury note yield booked its largest weekly rise since June at the end of last Friday, leaving it at 1.13% at last check, the real 10-year yield stood at negative 0.93%. New technologies, like those developed in Silicon Valley, may be less capital-intensive. The Treasury market is really just an extension of Fed communications, which are an extension of economic strength/weakness. Which of these hypotheses is right? Why Investors Fell for Low-Yield Savings in 2020 ... the federal government while also providing a greater yield than some savings accounts. But the more important dynamic here is the source of this demand. These rates include mortgage interest rates, auto loans, and business loans. From a bond traders perspective that means one thing – yields aren’t going to surge because the economy will remain weak and even if the economy strengthens marginally the Fed has been very clear that they’re going to play it on the safe side and keep rates low for several more years. The remaining question is why inflation-adjusted interest rates — what economists call real interest rates — have declined so substantially. So demand is high thanks to this dynamic at work. But this so-called Fisher effect is only a piece of the puzzle. It may be tempting to blame the Fed and specifically its recent chairs, Jerome H. Powell and Janet L. Yellen, whom President-elect Joseph R. Biden Jr. has nominated to become Treasury secretary. Is All of Finance Just a Big Network Effect? That is probably right, to a degree. ... the 30-year Treasury bond yielded a parsimonious 3.02%, the 10-year, 2.41%, and the five-year only 1.90%. Since rates and … It also means that individuals will need to rethink retirement saving. Japan's giant pension fund wants to know why low interest rates are so stubborn. When the Fed sets low rates, it is acting more like a messenger, telling us that the economy needs them to maintain equilibrium. Traditionally, even bonds from countries with a low chance of default contained some amount of risk because there was a risk of inflation or that bond prices would change. Thanks for playing, Ben.”. As of today, 1y Treasury yields are 0.11%, 3y are 0.21%, 10y are 0.88%. What accounts for this decline, and what does it imply for personal and public decision-making? The natural rate is determined not by the central bank but by deeper market forces that govern people’s supply of savings and businesses’ demand for capital. In today's "Off the Charts," Bloomberg's Scarlet Fu takes a look at why U.S. Treasury yields are so low. Businesses with increasing market power not only raise their prices but also invest less. Some economists, most notably the New York University professor Thomas Philippon, have suggested that the economy is less competitive than it once was. In the short run, yes, but not in the long run. Bond investors face a challenging environment. The Chinese economy has grown rapidly in recent years, and China has a high saving rate. Ie, Ben Bernanke writes a love letter to the bond market saying: “Dear Bond Traders, we will be buying an unlimited amount of 30 year bonds at X%, and since we have unlimited ammunition to perform this task we hope you enjoy getting your faces smashed into the concrete if you should be so foolish as to take the other side of this bet. Today, it yields less than 1 percent. My guess is that a more plausible projection is an inflation-adjusted return of about 3 percent. In many cases, yields … But as we go further and further out the market controls more of the movement, but that doesn’t mean the Fed has no control of the long-end  and in fact, if they wanted to, the Fed could theoretically control the entire curve. As I’ve previously noted, there’s a very high correlation between moves across the curve and the Fed’s actions. So, I don’t think we need conspiracies or asset shortages to understand what’s going on here. Three Things I Think I Think – Happy New Year! It all started earlier this week when Jeff Over the same period, the critical short-term rate set by the Federal Reserve, the federal funds rate, has fallen to nearly zero from about 16 percent, and the rate on 30-year mortgages has dropped below 3 percent from over 18 percent. They’d just do the same thing at the 30 year bond that they do with the overnight market and they’d set the price verbally. Economists don’t entirely know why rates have been so low for so long, or whether they will turn out to be mainly a boon or a danger. Treasury Yields Predicted the 2008 Financial Crisis . But interest rates could always return to more normal levels. To the extent that the rich have higher propensities to save, more money flows into capital markets to fund investment. There are, however, also upsides to the decline in interest rates. This Man Lost Everything Betting on Stocks, see my debunking of the “bond bubble” from several years f, EVENT ANALYSIS: Thoughts on the Eurozone “Breakthrough”. When expected inflation falls, as it has over the past 40 years, interest rates typically do as well. It meant that investors did not require a higher yield for longer-term notes. Although government debt is near its highest point as a percentage of gross domestic product, servicing it hasn’t been a problem. Since the 1970s, average economic growth has slowed, perhaps because of a slower technological advance. Very likely, a combination of these forces is at work. And at the base the Fed controls 100% of the movement. For example, as treasury yields increase, so do other interest rates. Their increased precautionary saving and especially their greater demand for safe assets drive down interest rates. First, falling bond yields are driven by the macroeconomy, and are nothing new. Meanwhile, yields on riskier fixed income investments… Economists don’t entirely know why rates have been so low for so long, or whether they will turn out to be mainly a boon or a danger. For example, a balanced portfolio of half stocks and half bonds has historically earned a return of 8.2 percent, or about 5 percent after inflation. We can get into complex discussions about “safe assets” and “debt monetization”, but the simple fact of the matter is that demand for Treasury’s has been extremely high regardless of the supply. Thirty-year Treasury yields were also off their record low of 0.70%, last trading at 0.904%. Some of the implications of low interest rates are already clear. We just need to understand the thinking of a very influential entity forecasting a very clear message to the market that says: “buy our bonds, we’ll make sure you don’t get your face smashed in any time soon!”, "While Ben Graham was the consummate 'bottom up' investor, it could be said that Cullen Roche is the consummate 'top down' investor." Even without recent fears about the coronavirus and an oil price war between Saudi Arabia and Russia, Treasury yields have been low after years of easy monetary policy from the Federal … That is, the Fed controls 100% of the curve at the short-end and the market controls an increasing portion of the curve the further out we go. Long-term bond yields in major advanced economies have fallen noticeably over the past six months. Events like the financial crisis of 2008 and the current pandemic are vivid reminders of how uncertain life is and may have increased people’s aversion to risk. 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