Why are bond yields so low?
As we closed out 2013, the yield on the benchmark 10 year US treasury bond stood at 3.03%. Most analysts predicted that a strengthening US economy would result in higher yields, with many estimates reaching 3.50% before 2015. What happened? Starting in January, we saw yields fall, which decline has continued through today (2014 low point - 2.40% on May 29th - the date revised 1st quarter GDP revealed contraction of -1.0%).
What is the bond market telling us? Hard to say. Typically, falling bond yields indicate growing expectations that GDP growth will slow. That part of the story is supported by the poor 1st quarter GDP data seen here in the US. But, there appears to be more to this story. The following excerpt is from a WSJ article of 6/2/2014:
"Many economists say this is less a sign of economic weakness than of special circumstances, fueled by central-bank efforts world wide to stimulate growth by holding down interest rates. This isn't about the economy....yields could continue to fall to 2.2% or lower, but, that would be due to market momentum, not economics. There are other underlying reasons as well:
a. Rising bond demand from pension funds and insurance companies.
b. A shortage of longer-term bonds. The narrowing US deficit has caused a sharp decline in US Treasury bond issuance.
c. Low interest rates in Europe - Germany (1.37%) and France (1.77%). Even lower rates in Japan (0.58%)
d. Last year's big stock gain, which left some people overexposed to stocks and unsure of the outlook. They have been buying bonds to rebalance."
I thought this article gave some credible alternate explanations for the recent drop in yield. Time will tell if the 1st quarter contraction was due to a brutal 2014 winter season here in the US or if there really is more to this story. Stay tuned.
