10-year and 30-year Treasury yields fall to new lows

[progree]

Source: CNBC

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, traded at 1.3608 percent — near a record low — while the yield on the 30-year Treasury bond was down at 2.1356 percent, also close to a record low. Meanwhile, the yield on Switzerland's 50-year government bond fell below zero for the first time on Tuesday, according to Reuters.

Uncertainty surrounding global growth and the U.K.'s referendum vote resumed among investors Tuesday after a strong rally in equities last week. ...

Sterling (Exchange:GBP=) has also fallen to a 2-1/2 year low against the euro (Exchange:EUR=) and redemptions in one U.K. property fund have been halted after a string of outflows. The pound also fell to a fresh 31-year-low against the dollar early Tuesday.

Read more: http://finance.yahoo.com/news/us-10-treasury-yield-falls-130817698.html

---

The article says "near a record low" and "close to a record low", while the title says "fall to new lows". I think yields are slightly up from an intraday all-time low, I dunno. Friday was also a then all-time low on both of these yields (10 year and 30 year).

They say it's a result of a flight to quality in the wake of Brexit -- pushing US Treasury bond prices up, and thus yields down (yields move inversely to price).

S&P 500 down 0.83% to 2085; Dow down 0.71% to 17,821; Crude Oil down 5.02% to $46.53/b as I type this at 105 PM ET. I know these aren't big moves (except the crude oil move is kind of large), especially considering these had almost reached their pre-Brexit levels on Friday, but thought it might be of interest anyway to someone interested in Treasury yields.

Meanwhile, the yield on Switzerland's 50-year government bond fell below zero for the first time

Imagine intentionally "investing" in something for 50 years, knowing with certainty that you aren't going to get it all back if you hold it to maturity.

[tonyt53]

1. These numbers do matter, but many people don't realize it.

[LonePirate]

2. How much of this is people fleeing anything British vs. people globally seeking safety in US bonds?

Does that Swiss bond news have the makings of a canary in a coal mine?

[progree]

3. Good questions, I don't know. I think there is a flight away from several other European

countries (but not all). Switzerland is not in the European Union, so that might be one reason its bonds are going higher (and yields lower)

There are lots of negative yield bonds in Europe. This article is from August 2015 --
http://www.kiplinger.com/article/investing/T052-C000-S002-negative-yields-fixed-income-bonds.html

[Eleanors38]

33. Good point. If everything looks worse for investment, paying the government

for the service of returning 90+% of your money might not be a bad move in an investment enviornment which looks worse.

[whatthehey]

4. Impossible

DU's economic experts say the US economy is on the brink of utter collapse and that financial market bigwigs rig the global economy. If these same bigwigs are putting money into the US as a safe quality investment for decades, then this surely cannot be true. What will the banksters do when Kunstler et al. are finally proven right and their reserves are tied up in suddenly worthless US T Bills?

[Yo_Mama]

14. German bond yields have been mostly negative for a while. UK pays lower int rates

than we do. Swiss 10 year is negative 68 basis points.

Try this:
http://www.bloomberg.com/markets/rates-bonds

In Europe, the Brexit vote seems to have sharpened pre-existing concerns on government solvency. So some countries' yields are dropping while others are rising, based on perceived risk.

There's more in play, including the EU's negative interest rates and the need for collateral in that currency.

But if you want to compare risks by looking at ten year government bond rates, the US isn't doing that well relatively.

Realistically, the international market for government bonds has a lot to do with currency arbitrage, so it is not that simple.

[happyslug]

19. People are looking for safety, thus want US bonds.

US Bond yields of 2 to 6 percent is the NORM for a healthy economy. Higher yields reflect to much fear of inflation, lower yield to much fear of deflation. Of the two. deflation is worse (The Great Depression was a huge deflationary period, housing values drop almost 95% between 1928 and 1938).

Basically, the low rates are the result of investors fearing every other form of investment, they want safety not risk (and with risk you get profit). Such fear of investments is NOT good and sooner or later something will break, and it will take place over a long time period, such as the 10 years of the Great Depression, or the even longer time period of the "Long Depression" which way from 1873 til 1897 (Some sources says it was a shorter time period, for you has several false bottoms that did not last long till another recession hit and that pattern continued till 1897 when Gold inflation caused by the massive discovery of Gold in South Africa, Australia and Alaska lead the world out of that depression).

More on the Long Depression:

In the United States, economists typically refer to the Long Depression as the Depression of 1873–79, kicked off by the Panic of 1873, and followed by the Panic of 1893, book-ending the entire period of the wider Long Depression. The National Bureau of Economic Research dates the contraction following the panic as lasting from October 1873 to March 1879. At 65 months, it is the longest-lasting contraction identified by the NBER, eclipsing the Great Depression's 43 months of contraction.

https://en.wikipedia.org/wiki/Long_Depression

[whatthehey]

20. And would an economy facing imminent collapse provide safety?

All we see on DU economy echo chamber threads is that it's all ready to fall apart. So why does a 30 year bond still pay pretty close to current low inflation rates?

[happyslug]

23. It the past, the declines have been long and painful, not short and deadly.

Thus the economy SLOWLY goes down hill. The general rule of thumb is it takes twice as long for a financial bubble to implode, then it took for the bubble to expand. Thus the Great Depression lasted over 10 years, the Long Depression over 20 years. A recent case was Russia after the collapse of the Soviet Union, Russia stayed in a depression from about 1989 till about 2000 before it broke out of its depression. People suffered a lot during that time period for the drop was severe, but the actual economy kept moving along, sick but still working to a degree.

In the Great Depression, the real killer was the decline in the economy from March 1930 till March 1934. The economy had recovered from the stock market collapse of October 1929, by March 1929, but then moved into a slow but steady decline. By March 1934 the only bank still open was the US Post Office (Which by law could NOT make large investment loans and thus escaped the economic collapse.

The problem is NEVER getting the economy going after a Recession had ended, that lead to the length of the Great and Long Depressions. Such an expansion require an increase in inflation and right now no one in Government wants to cause the level of inflation we need to avoid the deflation that is ongoing.

[whatthehey]

26. Apparently REALLY slowly then

Since I read the site for many years before I posted and this imminent collapse was being projected from the very start, and lots of very savvy financial gurus are STILL lining up to commit their money to this economy for a generation with very little return.

[GummyBearz]

21. Punish anyone who saves a nickle!

Reduce rates such that no one earns interest from a bank. The banks get to use the capital until American's do their patriotic duty and spend it alllllllllllllllllll!!!!

[happyslug]

24. Actually, if you want to boost the economy, banning savings is one way to do it.

Economic growth is the transaction people do with each other when they buy and sell things and services (if you agree to mow someone's lawn that is a "service" you do in exchange for cash).

We need to increase SPENDING, which implies a reduction in "Savings" (Which in Economics include paying off existing debts, i.e. when you pay off your credit card, you are increasing your "savings&quot .

[GummyBearz]

34. Yea

Negative incentives for savers actually hurt Japan quite a bit in the last 20 years. They actually just saved more even with negative effective interest rates, pulled money out of banks, and stashed it away. How about we get back to having a normal economy in which capital isn't free. The banks don't pay anything for all the direct deposit paychecks they get, yet they do use it to meet capital requirements (ie. offset risk) on their balance sheet. Such a mockery of the free market

[happyslug]

35. Japan is another example of the need to spend money

Japan has had excessive savings over the last 20 years, it needed to spend money not save it. That is why its economy has been a mess.

[GummyBearz]

39. Read my post

Japan has tried to make their citizens spend more for 20 years by having negative effective interest rates, it backfired for 20 freaking years. You don't get people to spend more by threatening them, you get them to spend more by making them feel like they are economically safe and can actually afford to spend it.

[happyslug]

40. The problem with Japan was the extra money went to the rich

Zero interest rates only work if you have consumer demand, that means getting more money into their hands. You get more money into people's hands by increasing income to the lower classes, people making less than median income. Zero interest rates have no effect on them, increase wages does.

Japan, like Europe, decided to help the rich, by giving them low interest rates, paying for it by increasing taxes, and cutting benefits, on those making less than median income. For zero interest rates to work, income for those making less than median income had to go up at the same time. That NOT occuring the zero interest rate has failed.

Unfortunately, both the EU and Japan are committed to zero rates and austerity and it has not work and will not work to get the economy going. Both need massive government spending and both are looking for someone else to do the spending. The US has refused to spend the money, as has China. Russia is not rich enough to do the required spending, which means this economy will continue to stagnant till someone does.

When someone does the required spending, the rest of the world's negative rates will kick in expanding the boom, but no one is willing to spend the money, everyone is looking for someone else to do the spending. Sooner or later something will break, it may be riots, it may be war, it may be strikes. That will lead to increase spending. What will cause the break I do not know, but the present economic system is unstable and that is never good.

[AdHocSolver]

38. To boost the economy by getting people to spend money...

...try raising the minimum wage and providing jobs for all of those people who want to work.

Then prevent the banks from charging usurious interest rates on credit card balances, and prevent the banks from charging usurious interest rates on student loans.

Make healthcare affordable through a single payer health insurance system, and make the corporations and billionares pay their fair share of taxes by preventing them from stashing their profits in foreign tax havens.

Finally, make the banks pay depositors 2, 3, or 4 percent interest to depositors for putting their savings into their accounts.

If people have money to spend, then they will spend it.

[muriel_volestrangler]

5. Can anyone explain how the yield on a 50 year government bond becomes negative?

With a normal government bond, the government promises to pay a certain amount to the holder regularly - eg a 50 year government bond that yields 1% could cost $100, in which case the owner gets $1 per year and gets the $100 bak after 50 years. The bond can then be traded; if it's price goes up, then the yield goes down, eg up to $200 means the yield is now 0.5%. The $1 per year payment doesn't vary.

But to get a negative yield, you have to have an agreement to pay the government, not the other way round. And it's for the life of the bond - 50 years in this case.

Are there really people now promising to pay the government every year for 50 years? If general interest rates went up a bit, the entire bond would become not just worthless (who wants to buy an obligation to give money regularly?), but the agreement to pay would still be there.

I can understand short-term loans to the government having negative interest rates, at a time you think any bank might go bust and there's a risk you might lose money if it's there. But to think that will last for 50 years?

[closeupready]

6. It becomes negative when other investments are even worse.

For example, just holding cash under your mattress earns you 0%, but when you account for inflation, you'd have a return on those cash holdings of negative 2 or 3% per year.

You invest in Swiss bonds, you get back your money at better than -2%, and you've beaten your mattress!

If the very viability of a state is in question, that introduces another level on which to be concerned about losing value.

If a state's viability isn't in question (like the UK), but their ability to trade with other states is, again, these things affect value, etc.

[muriel_volestrangler]

8. So is this yield for inflation-linked bonds, then?

ie you get back more than you put in, indexed to inflation? Or when they say "a negative yield", they just mean "a yield below the current inflation rate"?

If it's the former, it would still need to be a brand-new agreement with the government that involves a promise to pay them regularly for 50 years, even if they'll give you more back in the end.

[closeupready]

10. Though dicey to trust, I presume the journalist fact-checked, and when

he/she reports that a certain bond gets a certain percent return, that the stated figure is indexed for inflation. But again, it's dicey trust the modern media to report things accurately...

[progree]

9. I don't believe these Swiss bonds are inflation-adjusted, so you are worse off than under the

mattress.

So if you put $100 under the mattress, you get $100 back, if nobody steals it and the rats don't chew on it.

But if you bought a negative yield Swiss bond for $100, you would get less than $100 back. Either because you bought it at a premium or because you've been paying the Swiss government interest over the years that needs to be part of the accounting (I don't know which it is, maybe both)

After inflation, both are losers in terms of purchasing power, with the Swiss bond being worse off.

[closeupready]

11. Good points. I know people who are getting crazy returns of 8-10%

in government bonds, but those governments are not seen as being at all stable. Thus, factored into a decision about investing in these bonds is the real possibility of, some day, seeing the bonds become worthless.

[progree]

13. Yup. Like Greece, and the Ukraine, and ...

countries where their currency has been declining for a long time and is expected to continue declining for a long time compared to the U.S. dollar (generally countries with high inflation). So while the yields are great in terms of local currency, they suck when measured in dollars and in purchasing power.

http://www.investing.com/rates-bonds/world-government-bonds
Greece 2 year : 8.28%
Turkey 2 year: 8.14%
Ukraine 2 year: 21.000%
Russia 2 year: 9.33%

Edited to add (thanks Yo Mama) -- Greece's currency is the Euro, so the high yield on Greek government bonds is due to insolvency risk. And for all countries generally, insolvency risk is a factor along with expected currency moves.

[Yo_Mama]

17. Greece is Euro - it's the insolvency problem there. There's already been write-downs.

But then there's the currency arbitrage function, and since we globally went to the extremely low rate regime, it seems to me that any bonds that aren't dominated by risk are dominated by expected currency vs currency movements.

[progree]

18. Yup, yup, and yup. Thanks! nt

[muriel_volestrangler]

12. I think they must be giving the 'yield to maturity' aka 'redemption yield'

See eg http://monevator.com/how-to-calculate-bond-yields/

the calculator here: http://www.moneychimp.com/calculator/bond_yield_calculator.htm may or may not be reliable at extremes. But give it a $1000 par value bond, 1% coupon rate, 50 years to maturity, and current price of $1500, you get a current yield of 0.667% (which makes sense, and was what I thought was being quoted in the article) but a yield to maturity of just 0.001%. Any current price over $1501 gives a YTM of 0, even though the current yield continues to drop; I suspect that ought to be negative, but the calculator was set up to stop at zero.

[progree]

15. Well that certainly makes sense

Last edited Tue Jul 5, 2016, 05:20 PM - Edit history (1)

A yield to maturity takes into account both the coupon rate (periodic interest payments) and also the premium/discount -- what one pays for the bond compared to what one gets back for it at the end (always face value at the end, I presume, if held to maturity). Thanks for the links

[progree]

7. The Kiplinger article says that generally buy a T-bill at a premium

e.g. buy a German T-bill for $101 and get $100 back at maturity -- but their example is a T-bill, which I believe by definition means a maturity of less than a year. (??). I'd have to do some research on negative yield multi-year or multi-decade bonds -- maybe those are also sold at a premium and you get back the face value at maturity. So I don't know if the buyer is actually making periodic "interest" payments to the issuer as well.

I guess if a European is super-duper risk-adverse enough, and that's all there is in the realm of safe fixed income (and one is so super-duper risk adverse that they don't want to buy something U.S. and risk currency fluctuations and added fees) or whatever, and doesn't want to stash their life savings in a safe under the floor and ....

But locking in 50 years for less-than-no-return!!!

I'm glad we don't have that situation here in the U.S. yet.

[Yo_Mama]

16. They're not promising to pay the government - the yields are calculated based on buying prices.

So if the bond pays 1% a year, but the price is higher than face ($100 bond sells for $105), of course you can get negative calculated yields.

First, if the central bank is imposing negative interest rates on money deposited with it, it may be better to buy a bond. Second, a lot of these are used for collateral, and third, many are used for currency arbitrage, so the actual return doesn't matter.

[muriel_volestrangler]

22. I think it must mean the yield to maturity, no the current yield

See #12. A $100 1% bond selling for $105 would have a current yield of 1% * 100/105, ie under 1%, but you couldn't make the current yield negative. But if you calculate the effective yield of holding the whole thing including what you get back at the end (much more complicated), it can, I think, go negative.

[Yo_Mama]

32. Yes, government bond yields cited are yield to maturities. n/t

[IronLionZion]

25. Higher demand pushes yields down (and prices up)

it went below 0 because investors viewed the Swiss treasury as being a safer place to park their cash than stocks and other investments. Lower yield means it is viewed as having lower risk as well. And some people are willing to pay for safety during uncertain times. High yield corporate bonds are called "junk bonds" for the risk reason.

For how to benefit from this: if you had bought 50 year bonds when their yields were high(and prices low), now would be a great time to sell them for a gain since prices are high.

US treasury yields are probably going to slowly increase as the federal reserve raises rates as the economy improves.

As for short term bonds, central banks of countries are often used as a way to park large amounts of cash between trades. So mutual funds would be among the types of people who lend money to the government for short durations while they purchase or sell investments. Retirement plans would use the intermediate and long term bonds.

[muriel_volestrangler]

27. I think it's the difference between 'current yield' and 'yield to maturity'

See #12. The current yield can't become negative (if it started positive, anyway); but the yield to maturity can.

[IronLionZion]

30. Yup, I think you're right

YTM can go negative so that must be what they are quoting.

http://www.investopedia.com/ask/answers/06/negativeyieldbond.asp

[roamer65]

37. It is a tool for currency manipulation.

If investors flock into Swiss government bonds, it drives the franc higher. Negative interest rates are a way of saying "Take your money elsewhere, we don't want it here."

This is what a currency war is like, folks. Competitive currency devaluation, aka "beggar thy neighbor".

[Binkie The Clown]

28. It's news stories like this that make me glad I don't have any money.

I sleep peacefully at night knowing my net worth can't possibly crash.

[Eleanors38]

31. Jeeez. My 2% fixed annuity is looking like speculation rates!

So much for gradual rises in the rate.

[roamer65]

36. Bond rates will probably go negative here in the US.

But I do expect savings accounts and CD's to stay at zero or just slightly above it. If those were to go negative we would have a bank run. Then would come the capital controls and limits on cash withdrawals, just like Greece.

If you think I'm wrong...think about your average checking account. No interest paid or very little and the fees force it negative.