Recently Jim highlighted the odd behavior of the various Treasury term premia. Here are some additional thoughts. From “Debt market goes off scriptâ€Â in the WSJ:
Yields on short-term U.S. Treasury debt maturing in two to five years hit the highest level since 2011, reflecting an investor scramble to place bets on an expected Federal Reserve rate increase as soon as next spring. …
At the same time, yields on government debt maturing in 10 or more years have risen only modestly this week and remain well below their levels at the start of 2014, a year that many analysts forecast would include rising long-term interest rates and falling bond prices. …
The softness of longer-term yields highlights concerns shared by many analysts and policy makers about the uneven growth of the U.S. economy and falling expectations for inflation. Investors broadly expect the Fed to raise the fed funds rate next year for the first time since 2006. But many analysts say that even a small uptick in rates could slow the economy and send already-low inflation further below the Fed’s target.
A competing hypothesis was laid out in “US bonds are tracking ECB policyâ€Â in the Financial Times:
The link between US monetary policy and US bond yields has fallen apart this year, showing how fears of deflation in Europe are driving global financial markets.
According to analysis by the Financial Times, the correlation between five- and ten-year Treasury yields has fallen to its lowest level on record, with US bonds appearing to track European monetary policy instead.
Nominal and Real Spreads Are Still Positive, Despite Having Narrowed
Should we worry about imminent recession? There’s been some discussion of the age of the recovery and hence the anxiety. [0] [1] While spreads — both nominal and real — have indeed narrowed, they are still generally positive. As Chinn and Kucko note (blogpost), while spreads do not have extremely high explanatory power for recessions and growth, they do contain some information.
