Treasury yields signal decline in investor economic exuberance
The recent decline in US Treasury yields reveals some investors’ doubts about the strength of the economy in the coming years, even as inflation hits its highest level in more than a decade.
Yields, which fall when bond prices rise, surprised more than one by slipping in the second quarter of the year. This marks a reversal from the sharp rise in the first three months of the year, when markets generally rode a wave of optimism that stimulus and reopenings would spur a roaring 1920s-style acceleration.
The yield on the benchmark 10-year US Treasury bond stood at 1.479% on Tuesday, down from 0.913% at the end of last year but down from 1.749% at the end of March.
Treasury yields play an important role in the economy, helping to fix borrowing costs on everything from mortgages to corporate bonds. They are also a closely watched economic barometer, with longer-term yields particularly tending to rise when growth prospects improve and fall when they falter.
Yields on conventional and inflation-protected Treasuries still suggest that the economy will grow at a healthy pace in the years to come. But expectations are not as dynamic as in March. At the time, the yields reflected expectations that the Federal Reserve’s benchmark federal funds rate would stay close to zero this year, but start climbing by 2023 and stabilize at around 2.5%, with no the inflation rate does not fall below the central bank’s 2% target.