Current treasury yields in perspective

31 May 2012 by Jim Fickett.

The yield on the 10-year Treasury is down to an astonishing 1.57% today. It is notable that the 2% barrier held for months, and the recent drop happened in only the last few weeks:

(Data from the Federal Reserve H.15 report through last week. The value for this week is temporarily approximated by today's read from Bloomberg.)

Although many suggest that low yields on Treasuries indicate a lack of faith in US economic growth, or a projection by investors of low inflation, it is more likely that the main drivers are the Fed's interventions and fears over Europe. Evidence for the latter is that over the last few weeks the trade-weighted value of the dollar has risen in parallel with the drop in Treasury yields:

(Data and graph by FXtrek).

Although people often point out that the nominal yield on US Treasuries is still higher than those on Japanese Government Bonds, this is a meaningless comparison. Japan has been in a state of mild deflation for a long time, so a yield of 1% or so provides a small but positive real return. In contrast the yield on the 10-year US Treasury has been below the inflation rate for some time, so that one is, in real terms, paying the US government to hold one's money. This shows the extent of the current fear over Europe.