Why Ultra-Low Treasury Yields Might Actually Be A Good Deal

No, we won’t be loading up on 10-year treasuries anytime soon, especially after seeing yields spike from 2.5% to over 2.7% last week (which represents a sharp bond rout) just based on a few better than expected data points for the ISM manufacturing index and private payrolls.

However, Econompic has an interesting depiction of what 2.7% 10-year yields represent, making them less extreme than they appear.

Basically, a 2.7% yield doesn’t price-in simply 10-years of 2.7% interest rates going forward. It also prices-in two years of ultra-low rates, combined with eight years of low-but-substantially-higher-than-2.7% interest rates.

Thus one needs to factor in the Fed’s extreme near-term distortion of the credit markets. This is shown below by the blue line, and makes treasury yields appear a bit less wild:

(Chart via Econompic)

Chart

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