As the blue line below shows, the U.S. 10-year treasury bond now yields about what it did back in May 2009. Between then and now, yields rose to 4% on the expectation that the Federal Reserve would increase U.S. interest rates in line with both an exit from ultra-stimulative monetary policy and an economic recovery.
Now, as the Euro’s credibility is shot and we’re faced with the risk of a new global crisis, U.S. treasury yields have come crashing down just as they did during the 2008 U.S. financial crisis. It’s both the result of a ‘flight to safety’ into U.S. government bonds and the simple realisation that Ben Bernanke is now far less likely to raise interest rates any time soon. Interest rate hike expectations have fully aborted.
It’s also clear that U.S. treasuries can keep rallying much further if a new financial crisis truly emerges, since in 2008 yields went far lower than where they are now. Should deflation then emerge as a threat in the U.S., we could even see brand new lows for U.S. treasury yields, which would mean a huge rally for U.S. treasuries and America looking more and more like a Japan crash redux.
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