If the Economy is Doing so Well Why are Interest Rates so Low?

August 9th, 2014
in Op Ed

by Michael Haltman, LinkedIn

The 10-year treasury yield is currently sitting at 2.39%, the lowest rate of the year!

Of course looking at the geopolitical environment one could use the rationale that the reason for the decline in the 10-year yield is the flight-to-quality trade as investors look for a safe haven in which to park their money.

Follow up:

While that train of thought has some value, the push-back would be that the current turmoil kicked off by the Russian invasion of Crimea in February did not result in a leg-down in yield but that in fact the decline in rates has been a slow drip since the recent top of around 3.0% in December 2013.

So, if the economy is in fact improving, the Fed has been tapering its bond purchases and has spoken about the move to higher short-term rates at some point in the near future, why have 10-year treasury yields actually dropped so precipitously?

Here is commentary from Lawrence McDonald of Newedge regarding his view of the reasons behind falling rates:

'The first assumption, that economic growth is accelerating, is not really accurate...

But to this bond expert, the most troubling sign is that the 10-year yield has fallen relative to the 2-year yield. Known as a "flattening of the yield curve," this kind of relative performance tends to occur when bond investors don't think economic growth (and thus inflation) in the longer-term will outpace economic growth in the shorter-term.

In combination with his thesis that "the data is showing us something concerning in terms of the economy," McDonald determines that "all of those things together add up" to portray a dour portrait of economic growth...'

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