By One Measure, U.S. Rates Are Already Negative
Yield on 10-year Treasurys, adjusted for inflation, falls below zero for first time since 2012
April 8, 2016Negative interest rates have swept the globe, from Switzerland to Sweden to Japan.
By one measure, they're here in the U.S. too.
The 2016 rally in government bond prices has taken U.S. real yields, which subtract inflation from the 10-year Treasury yield, below zero for the first time since 2012.
The 10-year U.S. Treasury yield was recently 1.72%, which is below the latest reading on the core consumer-price index of 2.3%. By this metric, the real U.S. 10-year yield is -0.58%.
Inflation is the main threat to bondholders. Many look at real yields because they reflect the real purchasing powers investors obtain from investing in fixed-income assets. The fact that investors are willing to buy the 10-year note without enough compensation for an uptick in consumer prices has been confounding many analysts. Some are concerned that this leaves the bond market vulnerable to jolts if sentiment sours.
The fact that investors are willing to buy the U.S. Treasury's 10-year note without enough compensation for an uptick in consumer prices has been confounding many analysts. About a quarter of government bonds in Japan and Europe have nominal yields below zero, reflecting policy makers' embrace of negative interest rates in their latest bid to reflate stagnant economies.Germany's 10-year bond is yielding below 0.1%, raising the prospect that it too may soon trade at negative rates. The European Central Bank has increased its purchases, intensifying the investor scramble for safe bonds.Though negative nominal interest rates don't appear imminent in the U.S., investors say the gravitational pull of low rates overseas stands to pull real yields here further into negative territory, by pushing down nominal yields.Guy Haselmann, head of U.S. interest rate strategy at Bank of Nova Scotia, expects the 10-year nominal yield to fall to its lowest level ever, 1.25%, before 2016 ends, from a recent 1.72%, even if there isn't another market shock that leads to a retest of the February lows in stocks, riskier bonds and U.S. yields. The previous low, 1.40%, was set at the height of the 2012 euro crisis."If things get really bad…the yield will test sub 1%,'' he said.Such a state of affairs would have been unthinkable just a few years ago, when Wall Street analysts routinely predicted a swift return to 5% long-term Treasury yields, let alone in the early 1980s, when yields briefly topped 15% at the height of the U.S. inflation scare.That episode looms large in the minds of many investors and, some analysts say, policy makers. With yields as low as they are, it doesn't take much inflation to wipe out a bondholder's purchasing power, they say.U.S. inflation has been running below the Fed's 2% medium-term target for years. Even so, long-term U.S. real yields' foray into negative territory this year marks the first time since the euro crisis.To be sure, U.S. real yields aren't negative at 10 years by every measure. One popular yardstick to measure inflation-adjusted return is the yield on the 10-year Treasury inflation security. The yield was 0.133% Friday, near the lowest level since April 2015, according to Tradeweb. It was 0.717% at the end of 2015.Even so, the declines help to explain much of what's going on in markets now, with stocks flat to slightly up for the year and gold posting a 17% gain for 2016, reversing several years of declines.Rising stock prices and rising gold prices can seem at odds. But when real rates go negative much of the cost of holding gold evaporates, and the scars left over from the inflation of the 1970s remind investors to be safe, not sorry, even when a repeat looks like a long shot.Zhiwei Ren, managing director and portfolio manager at Penn Mutual Asset Management Inc., which has $20 billion in assets under management, said he would sell Treasurys if the 10-year yield hits 1.5%. The market "has not discounted enough inflation risk," he said. __._,_.___
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