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Bond Yields Drop Even Further

world-chart-2-ssJust when you think they couldn’t go any lower… bond yields drop even further.

On Tuesday, October 14, the yield on the 10-year US Treasury note dropped below 2.20 percent.  This yield had not been this low since the middle of June 2013.

The same day, the yield on the 30-year US Treasury bond fell below 3.00 percent.  This yield had not been this low since early May, 2013.

In Europe, the 10-year German bund dropped to 0.84 percent on Tuesday.  This is a new record low.

It just seems as if investors are getting more and more pessimistic about economic growth.

In Germany this week, the economic news was not good and an index of economic sentiment dropped into negative territory for the first time since late 2012.  European industrial production had declined in August at a rate that was greater than expected.  And, inflation in the United Kingdom slowed to the lowest rate since 2009.

Some analysts are saying that the growth rate in China could drop to the 4.5 percent level, substantially below the rates of growth that have been achieved in recent years.

Brazil and Argentina are stuck at low rates of economic growth.

All over the world, economic growth seems to be lagging.

This is taking the demand pressure off of prices.  On the supply side, oil prices have dropped to a four-year low and show indications of declining further.

And, as inflation has dropped in many areas along with real fears of actual deflation taking over, inflationary expectations continue to decline.

So, low expected growth rates accompanied by falling inflationary expectations have led to lower and lower bond yields.

Within this environment let’s take a look at the yield on the 10-year US Treasury Inflation-Protected securities.  This yield has dropped below 0.30 percent again.

As I have discussed in previous LearnBonds posts, this yield has dropped below 0.30 percent before due to large flows of risk averse funds coming from Europe seeking a safe haven.  The yield remained low as low as these funds stayed in the United States.

This is not the case now.  The decline in the yield on these TIPs has resulted, in my mind, from a reduction in investor’s expectations about future economic growth in the United States.

It is also my view that the recent decline in the yield on the German bunds reflects a decline in investor’s expectations about the future growth rate of the economies of the eurozone.  The lower levels of inflationary expectations had already been built into the German interest rates.

What really concerns a lot of analysts is the possibility that these expectations, the expectations of lower economic growth and lower levels of inflation…even deflation…reflect a concern that Europe…and even the United States…might be falling into a period of economic stagnation similar to the one that Japan has been going through for the last decade or so.

This period of economic stagnation in Japan has been resistant to many various efforts to stimulate the economy.  Even recent monetary and fiscal efforts have seemingly failed to get the hoped for increases.  Not encouraging.

Some economists, myself included, believe that the United States…Europe…and the world…is going through a period of economic transition.  This period is not unlike the time that culminated in the 1930s when many economies of the world were transitioning from an agricultural base to an industrial base.

This time around, we are transitioning from primarily an industrial base to an economy driven by information technology.

Such transitions take time and require a different focus than one concentrated on the business cycle.  The focus needs to be shifted to education, training, life-time learning, and greater flexibility and mobility in where work is located and how it is done.  And, such changes take time and are not accomplished within a period of a year or two, like an economic recovery.

If the United States…and others…are facing such a future, then interest rates could stay low for an extended period of time…like they did in the 1930s.  And, just having low interest rates…as was the case in the 1930s…will not do a great deal to encourage economic growth.

It is important to keep an eye on the bond market.  It is important to try and understand why investors are doing what they are doing.  Market prices…and yields…tell a story about how investors are interpreting the information that is available to them.

Although financial markets are not always correct, it is important to keep up with market movements and try and discern the reasons why these movements take place.  It helps us to understand how the market works and helps us to become better investors.

About John Mason
 John MasonJohn has been the President and CEO of two publicly traded financial institutions and an Executive Vice President and CFO of a third. He has also spent time as an economist in the Federal Reserve System and worked for a cabinet secretary in Washington, D. C. In addition John taught in the Finance Department at the Wharton School of the University of Pennsylvania for ten years. He now currently has a column on the blog Seeking Alpha and is ranked number 3 in terms of readers on the economy. From this column, two books have been published this past year from earlier blog posts. John is active in the shadow banking world, the venture capital space, and in angel investing. Other than that John works with start ups and early stage organizations, for profit and not-for-profit.

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