Societe Generale’s economist Aneta Markowska tries to explain why U.S. treasuries are yielding less than 3.6% right now. (The 10-year is at 3.44%)
Her three key observations:
1 – Inflation trends remain very low. Core CPI was flat in Q1 and the y/y trend now looks set to dip below 1%
2 – Fed has been very slow to embrace the cyclical recovery and shift to a more neutral policy stance. The “extended” language is a green light for bond investors to remain in carry trades.
3 – Treasuries and the dollar have benefited from safe haven flows.
As a result she believes “Treasuries are trading in line with fundamentals” despite the fact that “risks for bond yields are skewed largely to the upside.” She’s worried about the U.S. government’s financial situation, but believes that the country has far more time than Europe to address core problems. Thus the relative ‘safety’, let’s hope.