How Low Will They Go?

June 07, 2012 | Christopher Caparelli, CFA, Partner

Over the last few weeks, renewed concerns over the European debt crisis coupled with the release of negative economic data in the U.S. has led to a significant sell-off in global equity markets. As a result, U.S. Treasuries – which still serve as a favorite safe-haven despite last summer’s downgrade – have set record low yields across the curve. The nominal yield on the 10 year U.S. Treasury Bond set an all time record low of 1.47% on June 1, 2012, leading many to wonder how much further yields will fall before finally rebounding. Most important is that the new low pushed the real yield on the instrument further into negative territory. When adjusted for inflation, investors are actually losing money when they purchase 10 year Treasury bonds. The Federal Reserve continues to run an extremely inflated balance sheet which has contributed to keeping rates artificially low for quite some time now. While convention says yields must rise at some point, how long investors will be willing to accept a negative real yield on ten years’ worth of U.S. Government debt is anyone’s guess.