Why are U.S. bond yields so low? So much of the global debate these days is about this issue. Although most predicted rates would go up in 2014 - current Treasury yields for the 10-and 30-year issuances are at lows not seen since last June.
However, if you put this into a global perspective, the picture is a bit brighter. In comparison to Europe, U.S. yields actually look good. While U.S. 10-year rates dropped into the 2.4% range this week, German equivalent 10-year government bond yields are around 1.4% and French 10-year government bonds are yielding 1.7%. Dutch government bond yields are at 500-year lows!
Much of this has to do with a continued slowdown in Europe. Over the weekend, European Central Bank (ECB) President Mario Draghi again emphasized the risk of deflation in Europe and how tight credit lending by European banks is keeping the economy down.
At next week’s ECB meeting, Mario Draghi and his crew are supposed to announce some potentially dramatic monetary easing measures. Heightened expectations of lower interest rates in Europe have pushed the average eurozone government bond yields down to a 2.1%. International investors decided to stop putting more money there, prior to any solid announcement by the ECB. Consequently, much of that money has come to the U.S. Those investments in U.S. government bonds pushed our yields lower. The EUR also fell to a 3 ½-month low against the U.S. dollar, reflecting some of this shift.
My View: Talks of ECB's further monetary easing has ripped through the global bond markets, including the U.S. As long as the eurozone is threatened by deflationary fears, we will be facing chronically low long-term interest rates even in our monetary tightening mode.
|This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make an independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. The Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.|