Components of the 10-Year Treasury Yield
An interesting chart from the IMF showing the components of the 10-year Treasury yield. Note how oxymoronic credit risk (in pink) crept into the “risk-free” 10-year rate starting around the collapse of Bear Sterns. The IMF opines on what has driven yields from their 2.33 percent October low,
In sum, this analysis suggests that fiscal concerns do not appear to have led to a higher cost of funding during the most recent run-up in nominal bond yields. Rather, improving growth prospects and higher term premia are the main factors pressuring long-term rates higher. Furthermore, QE2 does not appear to have contained long-term rates. While the anticipation of QE2 initially led to a sharp compression in term premia, that impact was either fleeting or has been more than offset by other factors.
It’s an interesting exercise and just imagine where rates would be had not the FED effectively funded over 60 percent of the Q4 deficit. We believe Treasury yields are now one of the most distorted prices in the world. Except for the massive flight to quality during the financial collapse, foreign central bank recycling of BoP surpluses and now the Fed have been the marginal buyer of Treasuries (maybe not all 10-years) since mid-last decade. In fact, the Fed and foreign buyers effectively purchased the entire stock of new Treasury issuance in Q4.
Alan Greenspan even blamed foreign central banks for distorting interest rates and contributing to the housing bubble. Newsweek writes,
From early 2001 to June 2003, the Fed cut the overnight fed-funds rate from 6.5 percent to 1 percent. The idea was to prevent a brutal recession following the “tech bubble”—a policy Greenspan still supports. The trouble arose when the Fed started raising the funds rate in mid-2004 and mortgage rates didn’t follow as they usually did. What unexpectedly kept rates down, Greenspan says, were huge flows of foreign money, generated partially by trade surpluses, into U.S. bonds and mortgages.
So you think the distortion of the most important component of the credit allocation mechanism has anything to do with the credit crisis, the enabling of $1.5 TN budget deficits, and now why the private sector is hesitant to make long-term mortgages? We certainly do and look forward to seeing this chart updated after if the Cen Banks stop buying Treasuries.
Could it also be why the President is finally getting religion on the country’s fiscal position? We’re not certain where this all ends up, but it is certainly going to get very interesting. Stay tuned.
(click here if chart is not observable)
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April 14th, 2011 at 11:43 am
Barry, did you ever write part III on the end of QE2? I can’t seem to find it in the older blogs.
April 14th, 2011 at 11:55 am
I have a 9 percent portfolio position in I bonds with a base rate of 2.57 percent. When can I buy 10 year treasuries in the same proportion to the I bonds and know it was a good decision.
April 14th, 2011 at 12:51 pm
“Could it also be why the President is finally getting religion on the country’s fiscal position?”
His “religion” is to get re-elected (and he probably will).
His plan: (a) soak the rich, (b) cut defense, but (c) don’t do anything until after the election.
April 14th, 2011 at 1:01 pm
I’m confused. The IMF chart shows a definite rise in risk premia, but the IMF statement suggests increasing term premia as a key factor, which appear on the chart ot have all but disappeared. A parallel statement from the IMF suggests CDS spreads as the source of the thoughts on risk:
“In the United States, two opposing forces have been at play. First,
improved growth prospects (April 2011 WEO) have been reflected in
higher real yields (Figure 2.7, panel b), leading towards more normal
interest rate levels. Inflationary expectations are also picking up, although
they remain anchored (Figure 2.7, panel c).8 Second, the additional easing
from QE2 up to end-December, amounting to almost 56 percent of new
net issuance in 2010:Q4 (Table 2.2), is likely to have lowered bond yields,
other conditions being the same.9 Credit default swap (CDS) spreads
have been broadly flat, suggesting that solvency concerns have not played
a role in the increase in bond yields.”
(p 35, http://www.imf.org/external/pubs/ft/fm/2011/01/pdf/fm1101.pdf)
But what are the source data for the chart, then?
April 14th, 2011 at 4:47 pm
[...] The components of the 10-year [...]
April 14th, 2011 at 6:36 pm
Given recent history, why would anyone assume that banks willingness to write mortgages has anything whatever to do to any decision beyond the next quarter’s bonus for the upper executives? They were perfectly willing to write all sorts of paper based on completely bogus financial statements, knowingly falsified mortgage applications, ridiculous property validations and otherwise completely unjustifiable grounds based on any accounting or business basis. In fact, they nearly drove their institutions to bankruptcy, save for the grace of the much maligned government. If we want the banks to lend, set up tax breaks for lending based executive bonuses. Do that and they’ll lend money for million dollar termite mounds and gold plated monkey hutches.
April 14th, 2011 at 7:59 pm
Is the President that said during the election, during the time her regretted ok’ing stimulus needed to save American capitalism, and fought teh OGP on extending Bush’s temporary tax cuts for the rich, “…President is finally getting religion…”
When people like Rick Santelli claim that no politicians are telling us the truth, he must ahve not been listening to Obama for the last couple of years.
When people claim that “raising taxes will only get spent by Congress” missed the whole CLinton pay down of the deficit.
When people say Reagan never raised taxes…
http://old.nationalreview.com/nrof_bartlett/bartlett200310290853.asp
When people say everyone must sacrifice, do they include billionaires?
It’s time for the GOP to grow up.
April 18th, 2011 at 10:57 am
[...] the IMF’s global financial stability report released last week (picked up by Macroman and Barry Ritholtz) — and they show recent trends in US debt: In sum, this analysis suggests that fiscal [...]
April 18th, 2011 at 6:21 pm
The credit premium is based on 10-year sovereign CDS. Not sure that’s a liquid or efficient market. Or in fact that it’s a proxy for anything except the irrationality and gullibility of the people who buy them.