Why have US government bond yields declined?

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

"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.

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.

Recommended

The emerging-markets debt crisis
Emerging markets

The emerging-markets debt crisis

Slowing global growth, surging inflation and rising interest rates are squeezing emerging economies harder than most. Are we on the brink of a major c…
30 Apr 2022
Why food and fuel subsidies will push up debt
Global Economy

Why food and fuel subsidies will push up debt

Many governments have adopted subsidies or tax breaks to shield households and businesses from rising food and fuel prices. But that's just causing go…
28 Apr 2022
The bond-market bloodbath isn’t over yet
Government bonds

The bond-market bloodbath isn’t over yet

The bond-market sell-off isn’t done by along chalk – rising interest-rates could yet push yields higher.
28 Apr 2022
The truth about market manipulation
Investment strategy

The truth about market manipulation

Free, fair and transparent markets are a fiction. Investors need to be alert to the flaws, says Jonathan Compton.
28 Apr 2022

Most Popular

Get set for another debt binge as real interest rates fall
UK Economy

Get set for another debt binge as real interest rates fall

Despite the fuss about rising interest rates, they’re falling in real terms. That will blow up a wild bubble, says Matthew Lynn.
15 May 2022
High inflation will fade – here’s why
Inflation

High inflation will fade – here’s why

Many people expect high inflation to persist for a long time. But that might not be true, says Max King. Inflation may fall faster than expected – and…
13 May 2022
What the Ukraine crisis might mean for ESG investing
Advertisement Feature

What the Ukraine crisis might mean for ESG investing

The Ukraine crisis has brought many of the issues around ESG investing into sharper focus. Where does the sector go from here?
3 May 2022