Reduced demand for capital lowers interest rates. She speaks on "Bottom Line." Of course, the Fed’s not doing that, but this doesn’t mean their communications are not highly effective. Over the same period, the critical short-term rate set by the Federal Reserve, the federal funds rate, has fallen to nearly zero from about 16 percent, and the rate on 30-year mortgages has dropped below 3 percent from over 18 percent. If so, servicing the debt would become more costly. For much the same reason, public and private pension plans are probably more underfunded than current estimates suggest. The rate on the benchmark 30-year Treasury bond sank to an all-time low on Wednesday while the U.S. yield curve inverted even further as fixed-income traders grew more confident in … Events like the financial crisis of 2008 and the current pandemic are vivid reminders of how uncertain life is and may have increased people’s aversion to risk. Consider what has happened to three key benchmarks. New technologies, like those developed in Silicon Valley, may be less capital-intensive. As I’ve previously noted, there’s a very high correlation between moves across the curve and the Fed’s actions. On Jan. 3, … Since rates and … Feb. 2 -- In today's "Off the Charts," Bloomberg's Scarlet Fu takes a look at why U.S. Treasury yields are so low. To the extent that the rich have higher propensities to save, more money flows into capital markets to fund investment. From a bond traders perspective that means one thing – yields aren’t going to surge because the economy will remain weak and even if the economy strengthens marginally the Fed has been very clear that they’re going to play it on the safe side and keep rates low for several more years. The natural rate is determined not by the central bank but by deeper market forces that govern people’s supply of savings and businesses’ demand for capital. N. Gregory Mankiw is the Robert M. Beren professor of economics at Harvard. This debate has been going on for years in some form or another (see my debunking of the “bond bubble” from several years for related thinking) so I’ll keep my opinion on this short and sweet since I think the current environment is a rather simple one to explain. So a low-yield Treasury can mean businesses are enticed to borrow money, meaning that they will have more money to spend and, hopefully, create jobs and stimulate the larger economy. The highest supply in history directly implies the lowest prices in history, for every market in the world — except U.S. Treasuries.”. Even without recent fears about the coronavirus and an oil price war between Saudi Arabia and Russia, Treasury yields have been low after years of easy monetary policy from the Federal … That means that institutions like universities that use the return on their endowments to fund their activities will need to tighten their belts. Young families looking to buy homes, for example, benefit from the lower cost of mortgage financing. It all started earlier this week when Jeff Nielsen of Silver Gold Bull wrote: “Previously, my own writing has focused upon one particular aspect of this absurdity: the highest prices for U.S. Treasuries at a time of maximum supply. It all started earlier this week when Jeff The remaining question is why inflation-adjusted interest rates — what economists call real interest rates — have declined so substantially. Thanks for playing, Ben.”. Interest rates have fallen rapidly, to the point where many in the market believe the benchmark 10-year Treasury yield, which impacts mortgage rates, could fall below 2%. Ie, Ben Bernanke writes a love letter to the bond market saying: “Dear Bond Traders, we will be buying an unlimited amount of 30 year bonds at X%, and since we have unlimited ammunition to perform this task we hope you enjoy getting your faces smashed into the concrete if you should be so foolish as to take the other side of this bet. Treasury yields can indicate the overall state of the stock market and the general economy. She speaks on "Bottom Line." So why would you even own bonds with rates this low? This level is sometimes called the natural rate of interest. In today's "Off the Charts," Bloomberg's Scarlet Fu takes a look at why U.S. Treasury yields are so low. Today, it yields less than 1 percent. Moreover, some of the causes of low interest rates might give reason for concern. Interest rates around the world, both short-term and long-term, are exceptionally low these days. I often use the analogy of a dog on a leash. Economists don’t entirely know why rates have been so low for so long, or whether they will turn out to be mainly a boon or a danger. Businesses with increasing market power not only raise their prices but also invest less. So bond prices are rising and yields are falling. Traditionally, even bonds from countries with a low chance of default contained some amount of risk because there was a risk of inflation or that bond prices would change. The Fed aims to set interest rates at levels that will produce full employment and stable prices. The federal funds rate is back near zero, the 10-year Treasury yield remains stuck in a 0.5%-to-0.75% range, and inflation-adjusted (real) yields are deep in negative territory. (Source: Bloomberg) So, I don’t think we need conspiracies or asset shortages to understand what’s going on here. 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