As a sign of confidence that US inflation should remain under control, foreign governments have been switching out of shorter-term US goverment bills and into longer-dated bonds. Last week, when the US government issued $75 billion in new bonds, 10-year’s made up the largest percentage since 2005.
Stable headline CPI data released last week will only bolster this confidence and thus treasuries may have good news ahead especially since we can look forward to month-end buying from benchmarked funds.
Yields on the 10-year have gone from panic levels near 2% late last year to highs near 3.9% in June, and now 3.7% after their best 1-week rally YTD. The US dollar is rallying against most currencies and commodities are down.
It might be too early to think inflation will be benign over the next 10 years. Yet certaintly treasuries have fallen massively since late 2009 and could take back some ground. Even if long-term treasury yields still don’t fairly compensate for future US inflation, major foreign buyers investment options are limited. For those stuck buying US government securities, a long-term bond yielding 3.7% beats rolling short term bills for almost zero yield.
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