Why are US 10-year yields nearing all-time lows…and what does it mean?

Nothing like a crazy day in the markets to get the old blood flowing again. In our research here, we typically focus on specific opportunities in the FX, commodity, and equity markets, but we would be remiss if we didn’t mention the massive move taking place in one of the world’s most important (and some would say "smartest") market: bonds.

Despite all the talk in the media about preparing for a "rising interest rate enviroment," medium- and longer-term bond yields are actually at or approaching their lowest levels ever. Earlier this week, the 10-year JGB (Japanese government bond) went negative for the first time on record, and yields in Germany, another global safe haven, aren’t far behind at 0.19% as of writing.

Perhaps in that context, the current 10-year US Treasury bond yield of 1.64% looks reasonable, but that figure is also within striking distance of the all-time low of 1.53% set in July 2012. Indeed, that yield is down nearly 20bps already this week, so just one more day of global market panic could conceivably take the benchmark yield to all-time lows in the US as well.

So what does that mean for traders?

At the most basic level, a portion  of the decline can be chalked up to a decline in the "risk-neutral" yield component, which reflects expectations for the federal funds rate over the next decade. In other words, the decline in US bond yields confirms that traders think the Federal Reserve will be less likely to raise interest rates aggressively, mainly due to fading inflation expectations.

However, there is another component of the 10-year yield that has nothing to do with the Federal Reserve. The so-called "term premium," or the extra return that lenders demand to hold a longer-term bond instead of investing in a series of short-term securities. Locking up your money for a longer period of time is more inconvenient, so traders demand a higher return for doing so the vast majority of the time. In this case, the term premium also appears to be falling dramatically, presumably due to safe-haven demand.

Therefore, as long as global markets remain volatile, US treasury yields will likely remain subdued; conversely, US treasury yields may start to rise if the current bout of global liquidty subsides, even without traders anticipating a particularly rate hike schedule from the Federal Reserve.

Source: Yahoo Finance, FOREX.com

For more intraday analysis and market updates, follow us on twitter (@MWellerFX and @FOREXcom)

Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

The markets are moving. Stop missing out.

Open an Account