- Money Morning Australia

No Bull: Could the US 10-Year Treasury Note Yield Hit 1%?


Written on 06 June 2012 by MoneyMorning

In the wake of Friday’s disastrous jobs number, [US] 10-year Treasury Note yields finally fell through the 1.5% level, trading as low 1.44% on the day.

That plunge took many traders, talking heads and politicians by surprise.

Now that we’ve busted 1.5%, the next stop is 1%.

I can even see negative yields ahead, meaning that investors who buy US Treasuries will actually be paying the government to keep their money.

Why Bond Yields Will Continue to Fall

First off, 10-year yields dropping to 1% means several things:

  • Bond prices go even higher. Rates and prices go in opposite directions. Therefore when you hear that yields are falling, this means that bonds are in rally mode.
  • The world is more concerned with the return of its money than the return on its money. You can take your pick why. Personally I think it comes down to two things above all else: the looming disintegration of the Eurozone and the fact that our country is $212 trillion in the hole and warming up for another infantile debt ceiling debate instead of reining in spending.
  • More stimulus. Probably in the form of a perverse worldwide effort coordinated by central bankers as part of the greatest Ponzi scheme in recorded history.

Zero Percent or Negative Yields – in the US of A?


Yes. Given the state of financial disarray in our world today, this is no longer just a probability. It’s moved into the “likely” category.

Remember your history:

  • During the Great Depression, U.S. bonds traded at negative yields when investors didn’t trust the banking system or corporate bond markets.
  • During the 1990s, Japanese Federal bonds went negative as investors sought safety above all else. I remember mouths agape all over the trading floors when it happened and people realized that the unthinkable had just become reality. The headlines here give me a terrible sense of déjà vu.
  • In January of this year, Germany sold 3.9 billion euro worth of Federal German T-bills at -0.0122% yield, reinforcing the relative safety of German finances versus Greek and EU finances in general.
  • Last week German, Danish and Swiss bills all traded at negative yields.

How Low Can Bond Yields Actually Go?….

I don’t know for sure but the bond markets on both sides of the Atlantic give us a pretty good idea at the moment.

Take German 10-year bonds, for example. They closed Friday at a yield of 1.17%.

When you subtract the 2% official inflation figure it suggests investors may be willing to accept negative real yields as low as -0.83%.

In the U.S., 10-year bonds recently closed at a 1.45% yield. Subtract our latest official inflation rate of 2.30% and that suggests investors may push yields all the way to -0.85%.

Shorter term investors may accept far less; perhaps yields in the negative 1%-3% range, which again implies that anybody who buys these things is willing to end up with less money at maturity than they started with when they bought the bond or t-bill.

Bonds are traditionally thought of as safe haven investments but at this stage of the game, they’re more like jet fuel in search of a match.

There’s a lot of talk about how rates can’t possibly go any lower.

Don’t “buy it” — Japanese 10-year bonds are at 0.82% while German 10-year bonds are at 1.21%.

Not only can rates go lower, but absent a comprehensive, practical solution to the world’s debt problems – like actually reining it in – we will get there.

Just remember you heard it here first when 10-year note yields hit 1%.

Keith Fitz-Gerald
Contributing Editor, Money Morning

Publisher’s Note: This is an edited version of an article that originally appeared in Money Morning (USA)

From the Archives…

How Bad Monetary Policy Will End the Welfare State
2012-06-01 – Dan Denning

The Setting Sun of the Japanese Economy
2012-05-31 – Greg Canavan

The US Dollar – The “Strongest of the Weak”
2012-05-30 – Kris Sayce

Europe’s Energy Resource Puzzle
2012-05-29 – Kris Sayce

The Market Has Crashed, But This Graphite Stock Has More Than Doubled
2012-05-28 – Dr. Alex Cowie


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