Falling 10-Year U.S. Treasury yield sends signals
Funds are moving to U.S. government notes from other countries
With the current market yield of a 10-year maturity U.S. Treasury note falling below 1.6 percent, approximately 55 percent of S&P 500 stocks have a dividend yield higher than the yield on this U.S. government obligation. Investors traditionally focused on bond yields for their returns are being increasingly enticed to add exposure to dividend-paying equities.
The 10-year U.S. Treasury note is often used as the reference yield when rates on 30-year residential mortgages are determined. Given the extremely low U.S. note yield, interest rates on new residential mortgage loans should follow to lower levels. The risk associated with issuing a new, 30-year residential mortgage will also determine the ultimate rate for the borrower.
Although refinancing rates for residential mortgages will likely drift lower, the ability of many homeowners to refinance remains limited. Already depressed home prices and persistently high unemployment will hamper many current borrowers from benefiting from the latest decrease in rates.
One oft-cited reason for the ongoing decline in U.S. longer-term interest rates is the widespread level of economic uncertainty in many countries. While the U.S. does have a variety of economic concerns, U.S. government-issued notes are frequently viewed as a relatively safe haven. Investors are taking their capital out of more risky countries and buying obligations of the U.S. government. Given the very low yields on these new investments, the purchasers seem to be more concerned about a "return of capital" over time rather than a "return on capital."
Under a traditional interpretation of such low, longer-term U.S. interest rates, inflation expectations would be deemed to be very low. However, the yield of approximately 1.6 percent on a 10-year maturity U.S. government note may not be telling the whole inflation story in today's environment.
Flight of international capital to the U.S. bond market for credit and liquidity reasons and lingering effects of the Federal Reserve's efforts to lower longer-term interest rates through purchases of these longer maturities are likely distorting the future inflation expectation message.
Very low, longer-term interest rates exist in the U.S. Reasons for these historically low rates and implications of such dampened yields have domestic and international origins and ramifications.
Kirby Brown is the CEO of Beneficial Financial group in Salt Lake City.
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