Why have US government bond yields declined?

The global economic recovery maybe picking up speed, but US government bond yields are still falling. Why?

Andrew Van Sickle
By
published
in Features

"The surprise of the year has been lower government bond yields," says Economist.com's Buttonwood blog.

The yield on the ten-year US Treasuryhas 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.

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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.

Andrew Van Sickle
Andrew Van Sickle
Editor, MoneyWeek

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.

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