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Benchmark Yields Back in Charted Territory a Year After Record Low

10 Jul 2017 4:25 am

By Ben Eisen

A year ago Saturday, the benchmark 10-year Treasury note yield hit a record low, catching jittery investors off-guard and leaving many bewildered.

On July 8, 2016, the yield settled at 1.366%, extending a drop below record lows from 2012. Many said yields would head even lower, pulled down by global central bank bond buying. With comparable German and Japanese yields having already dipped into negative territory, it was only fair to expect the U.S. would follow, many said.

Instead yields have bounced back. They jumped as high as 2.609% after the presidential election as investors bet on faster growth and higher inflation under the Trump administration. Even as those expectations faltered in recent months, yields have traded in a range, never dropping lower than 2.135%.

A year later, the 10-year yield is up more than a full percentage point, recently trading at 2.385% on Friday. That's remarkably low by historical standards, but it shows once again how rates have defied expectations.

That's worth considering as the 10-year yield has climbed nearly a quarter of a percentage point from its 2017 low at the end of last month as investors brace for the possibility that the European Central Bank begins to withdraw its bond-buying stimulus. Some investors, such as Ray Dalio of Bridgewater Associates, have said that the period of easy-money policies is coming to a close.

Economists are again ramping up expectations for yields to keep rising. Last month's WSJ Economic Survey showed consensus expectations for the 10-year yield to rise to 2.66% by year-end, 0.45 percentage point above where it was trading at the beginning of June.

Torsten Sløk, chief international economist at Deutsche Bank, noted last month that year-forward projections for the 10-year yield in the Federal Reserve Bank of Philadelphia's quarterly survey of professional forecasters have been 0.6 percentage points too high on average since 2003.

Just as rates have defied forecasts in the past, they are bound to do so again at some point in the future. That's increasingly leading investors to exercise caution when trying to call the direction of rates.

"There are still many unknown variables that will occur this year that could cause rates to remain low or fall back down so investors should not bet too heavily on rates to rise aggressively in the back half of 2017," said Andrew Pace, a vice president at Performance Trust Capital Partners.

(END) Dow Jones Newswires

July 10, 2017 00:25 ET (04:25 GMT)

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