“The surprise of the year has been lower government bond yields,” says Economist.com’s Buttonwood blog.
The yield on the ten-year US Treasury has fallen from 3% at the start of the year to around 2.6% today, as prices have risen. European yields have also fallen. Yet with the global economy gathering strength, most analysts had expected higher yields – because stronger growth usually means higher interest rates.
So why have yields retreated again? Unexpectedly weak global growth earlier in the year hasn’t helped. Central banks – led by the Fed – have also made it clear that they intend to keep interest rates low for some time.
But “the simplest and perhaps most compelling” reason for the drop in Treasury yields is that it’s down to supply and demand, says Craig Dougherty on Fusionmarketsite.com.
Dan Clifton of Strategas notes that the quantitative-easing (QE) programme – under which the Fed prints money to buy bonds – is a key prop to the Treasuries market. But even though the Fed has been cutting (‘tapering’) its QE purchases this year, the number of new bonds being issued has been falling even faster.
That’s because the US budget deficit is falling, which means the amount the government has to borrow is smaller. As a result, the Fed has ended up buying an even greater share of newly issued Treasuries than it did last year.
In fact, in the six months to June it bought 73%, the biggest percentage since the start of QE. In short, the Fed is a bigger player in the Treasury market than ever before.