Earlier this month the Wall Street Journal posted the results of its August Survey of economists conducted August 3-6 (xls file). Let’s take another look at their estimates for 10-year yields. The various Federal Reserve strategies in recent years (ZIRP, QE1, QE2 and Operation Twist) have focused on lowering interest rates, for which the 10-year note yield is an interesting “tell”.
The 51 economists solicited for the latest survey were asked for their estimates for 10-year yields at six month intervals from June 2012 to December 2014. Not all of them participated, and responses dwindled a bit for the further out dates. The second chart below captures the ranges of responses for each of the six timeframes. But before we look at that chart, let’s refresh our memory on the recent history of the 10-Year Treasury Constant Maturity Rate, weekly data, through last week’s close.
As the snapshot above clearly illustrates, the 10-year note has been in a secular rally, as signified by falling yields, since the weekly yield peaked at 15.68 in October 1981. I’ve included recessions, inflation (based on the CPI) and the Fed Funds Rate to help us understand the role of the Federal Reserve in managing the long-term behaviour of this asset class.
Are we nearing a reversal of this trend? The economists who participated in the survey, for the most part, certainly think so.
As I type this, the CBOE Interest Rate 10-Year (TNX) is hovering around 1.75, five basis points below yesterday’s 1.80 close according to Treasury data. The mean (average) of economists’ estimates grows from 1.83 at year’s end to 3.25 in December 2014. At the high end of the range, one economist sees the 10-year yield above 5.80 by the end of 2014.
The Japanese Yields Exemplar
Could yields surprise in the other direction? That is to say, continue falling? We saw the 10-year yield hit an all-time closing low of 1.43 on July 25th.
Government bond yields in the safe-haven countries have been plunging of late. The lesson from Japan is that the trend toward lower yields can last a very long time. Here is an overlay of the Nikkei and the 10-year bond along with Japan’s official discount rate.
And here is a closer look at the 10-year yield over time.
The US is not Japan. But the experience of the Land of the Rising Sun (and falling yields) suggests caution in assuming that a sustained reversal in US Treasury yields is imminent.