Yield on 10-year Treasury debt below 3%

Liquidation, not deflation, is what is happening in the financial markets.
In the near future we will see hyperinflation.

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Financial markets notched up another historic milestone on Wednesday as the yield on 10-year US Treasury debt fell below 3 per cent for the first time in 50 years.

The decline in yields – to a low of 2.98 per cent – comes in response to unconventional policy measures taken by the US Federal Reserve this week aimed at pushing short-term and long-term interest rates lower.

This so-called “quantitative easing” is a strategy central banks use to fight deflation, the dreaded combination of declining growth and falling asset prices.

“It is astonishing [that yields are so low],” said Michael Chang, interest rate strategist at Credit Suisse. “The current environment is not like anything we’ve seen before. The Fed’s being very aggressive in quantitative easing, and the fall in yields is the result.”

On Tuesday, the Fed said it would buy $600bn of mortgage bonds issued or guaranteed by government agencies such as Fannie Mae and Freddie Mac. This pushed mortgage rates sharply lower.

The lower rates threaten to trigger a wave of refinancing of mortgages, the prospect of which in turn pushes investors to hedge that risk by buying 10-year Treasury debt, a benchmark for many mortgage rates.

Weak economic data released on Wednesday reinforced the gloomy economic outlook and the potential for declines in growth. The latest wave of data showed collapses in new home sales, consumer spending and orders for durable goods in October.

Such evidence of crisis in the US economy will fuel the Fed to try and stem declines in growth by pushing interest rates lower.

“Ten-year US Treasury bond yields are sitting at 3 per cent, below the trough reached five years ago when the market was last worried about deflation,” said analysts at Capital Economics. “But as the Fed embarks on quantitative easing, expect yields to fall further. We have 2.5 per cent pencilled in for 2009, but it could easily be less.”

US Treasury debt has been the best-performing asset class this year, notching up over 9 per cent in gains, according to a Barclays index. Investors owning corporate bonds have made losses.

By Aline van Duyn and Michael Mackenzie in New York
Published: November 26 2008 18:41 | Last updated: November 26 2008 18:41

Source: The Financial Times

1 thought on “Yield on 10-year Treasury debt below 3%

  1. The USA is approaching bankruptcy

    As hard is it is to believe, the US may have to default on it’s debt. Public debt has grown by more than 100% with all the bailouts. We currently have a debt level 3 times what the European Union allows it’s members. We are financially in far worse debt as a percent of GDP than Italy. Unfortunately, our Social Security Trust Fund is financed almost entirely by special bonds. Our government loaned themselves the money in the Trust Fund and spent it like drunken sailors at a strip club. We are left holding what may be worthless pieces of paper to guarantee our Social Security checks.

    ASIA – UNITED STATES
    U.S. debt approaches insolvency; Chinese currency reserves at risk
    by Maurizio d’Orlando
    In a few months, America’s public debt has grown to more than 100% of GDP. Fear of a valuation crisis for the dollar, with tremendous consequences for Asian countries, major exporters to the United States.

    Milan (AsiaNews) – In the United States, the danger of debt insolvency is growing, putting at risk the currency reserves of foreign countries, China chief among them. According to new figures published by Bloomberg in recent days (Nov. 25, 2008 [1]), the American government has employed a total of 8.549 trillion dollars to stop the financial crisis. This means a total of about 24-25.4 trillion dollars of direct or indirect public debt weighing on American taxpayers. The complete tally must also include the debt – about 5-6 trillion dollars – of Fannie Mae and Freddie Mac, which are now quasi-public companies, because 79.9% of their capital is controlled by a public entity, the Federal Housing Finance Agency, which manages them as a public conservatorship.

    In 2007, public debt in the United States was 10.6 trillion dollars, compared to a GDP (gross domestic product) of 13.811 trillion dollars. Public debt in 2007 was therefore 76.75% of GDP. In just one year, direct and indirect public debt have grown to more than 100% of GDP, reaching 176.9% to 184.2%. These percentages exclude the debt guaranteed by policies underwritten by AIG, also nationalized, and liabilities for health spending (Medicaid and Medicare) and pensions (Social Security)[2]. By way of comparison, the Maastricht accords require member states of the European Union (EU) to reduce their public debt to no more than 60% of GDP. Again by way of comparison, in one of the EU countries with the largest public debt, Italy, public debt in 2007 was equal to 104% of GDP.

    In 2007, 61.82% [3] of America’s public debt was held by foreign investors, most of them Asian. So the U.S. public debt held by nonresident foreigners is equal to about 109.39% (113.86%) of GDP. According to a study by the International Monetary Fund, countries with more than 60% of their public debt held by nonresident foreigners run a high risk of currency crisis and insolvency, or debt default. On the historical level, there are no recent examples of countries with currencies valued at reserve status that have lapsed into public debt insolvency. There are also few or no precedents of such a vast and rapid expansion of public debt. Link here.

    The United States of America is approaching bankruptcy

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