Key points: Treasury yields currently offer investors virtually no real return above inflation. 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”. Since rates and … My guess is that a more plausible projection is an inflation-adjusted return of about 3 percent. 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. Treasury notes are market traded and in 2020, … It meant that investors did not require a higher yield for longer-term notes. It all started earlier this week when Jeff Nielsen of Silver Gold Bull wrote: “Previously, my own writing has focused upon one particular aspect of this absurdity: the highest prices for U.S. Treasuries at a time of maximum supply. Very likely, a combination of these forces is at work. Feb. 2 -- In today's "Off the Charts," Bloomberg's Scarlet Fu takes a look at why U.S. Treasury yields are so low. 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. Inflation and the Constantly Low Yield Environment Bond yields are based on expectations of inflation, economic growth, default probabilities, and duration. Japan's giant pension fund wants to know why low interest rates are so stubborn. If so, servicing the debt would become more costly. Some thoughts: That means that institutions like universities that use the return on their endowments to fund their activities will need to tighten their belts. Although government debt is near its highest point as a percentage of gross domestic product, servicing it hasn’t been a problem. We don’t yet know which edge will be sharper. It’s a fair question a number of investors are asking themselves as we stare at generationally low yields in safe assets. A decline in growth reduces the demand for new capital investment, pushing down interest rates. Stimulus check update: $600 checks will hit some bank accounts Tuesday night, says the Treasury. – David Foulke, Alpha Architect. Treasury Yields Predicted the 2008 Financial Crisis . Source: Bloomberg and the Schwab Center for Financial Research. 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. So, in a world of messy assets where foreign bonds look unattractive, real estate is in the dumper and equities appear exceedingly risky, this communication from the Fed makes the Treasury market appear like a relatively safe short-term place to invest. One reason for the interest rate decline is a drop in inflation expectations. First, falling bond yields are driven by the macroeconomy, and are nothing new. According to my calculations, to support any given level of spending for a 20-year retirement, a person’s nest egg entering retirement needs to be 19 percent larger. Long-term bond yields in major advanced economies have fallen noticeably over the past six months. 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. It all started earlier this week when Jeff Why Investors Fell for Low-Yield Savings in 2020 ... the federal government while also providing a greater yield than some savings accounts. 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. In the evolution of the U.S. economy over the past four decades, one fact stands out as especially puzzling: the large and fairly steady decline in interest rates. 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. When expected inflation falls, as it has over the past 40 years, interest rates typically do as well. Some economists have suggested that with interest rates so low, the government need not worry much about increases in government debt. She speaks on "Bottom Line." 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%. This debate has been going on for years in some form or another (see my debunking of the “bond bubble” from several years for related thinking) so I’ll keep my opinion on this short and sweet since I think the current environment is a rather simple one to explain. Some economists, most notably the New York University professor Thomas Philippon, have suggested that the economy is less competitive than it once was. Hypothetical scenarios using the yield on a 3-month Treasury bill of 0.1% and the yield-to-worst of an average 5-year corporate bond of 1.0%. I often use the analogy of a dog on a leash. For much the same reason, public and private pension plans are probably more underfunded than current estimates suggest. Several hypotheses might explain the decline in the natural rate of interest: As income inequality has risen over the past few decades, resources have shifted from poorer households to richer ones. Why Treasury Yields Matter. Again, reduced demand for capital puts downward pressure on interest rates. At the same time, M2 money supply grew from 15.5kB on Mar 2nd to … Bond investors face a challenging environment. This level is sometimes called the natural rate of interest. Moreover, some of the causes of low interest rates might give reason for concern. There’s been a bit of a controversy brewing in recent days over the treasury market and why yields are so low. So why would you even own bonds with rates this low? Why Are Bond Yields So Low? Businesses with increasing market power not only raise their prices but also invest less. Some of the implications of low interest rates are already clear. 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 probably right, to a degree. Some answers are clear, but many more are elusive. 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