The Mayor world banks such as European Central Bank, Switzerland’s Bank, Deutsche Bank, Bank of England, Bank of Japan, and US FED still keeping yields on low levels – 0 point or even below.
US is now facing the biggest demand for U.S. government bonds ever, which was triggered by foreign investors who are searching for a safe harbor for their money, scared with Brexit, recent crisis in Greece, and possible crisis in Spain and Italy.
Those investors just can’t get enough of US bonds.
Eventually, that will be a good sign, because US government can borrow money a less than 1.4% interest rate.
At this moment Germany and Japan Government Bonds have ridiculously low interest rate, so called negative interest rate. Investors in those countries are losing money when they are buying bonds, which makes a US 1.4% rate a premium.
According to Fitch Rating: $11.7 trillion of bonds on the world market have negative yields.
That low yield on government bonds could trigger everything from mortgages and corporate bonds to borrowing costs for cities and governments around the globe.
There are some speculations that FED will raise rates again in last quarter of year. An interest yield rate is hugely correlated with bond yields and many times they are observed interchangeably. According to this, the cost of borrowing was never cheaper.
US two years yield and five years yields are going to become almost flat line as some technicians predict very few changes. That flat line is going to touch support level, and then what will happen, nobody can tell.
There are three possible scenarios according to Citi Technical’s:
- Bear flattening which means that short term yields will grow faster than long term
- Bull flattening, when long term yield would grow faster than short term
- Hybrid flattening, both will rise evenly or fall together
City bank research team came up with some historic events when the line was broken and inverted which caused economic slowdown and recession. Last two events were in 1994 and again in 1997. Maybe the US Economy will not be hit by flat line of yield curve as some City and many other major US banks analysts are predicting.
City bank claims confirm Allianz’s chief economic adviser Mohamed El-Erian who said that flat yield rate has much more caused by European Economy than US. Such low yields would be sign of massive recession but in fact it doesn’t happen yet.
On other hand if curve inverts for a 20 basis points than it could be rough, because it would reach same levels as 1989, 2000 and 2006 when all bad things happened and triggered massive economic down.
Mutual forecasts that Treasury yields will rise several times were wrong assumptions because 2009 is long way behind us, and FED is still keeping rates low.
The second red flag is that US dollar is on the highest level ever comparing to EURO and Yen which hurts US trade and making imported goods cheaper than US.
Maybe this is only a current trend on the world stage, but many experts are asking themselves – how low yields can go?
Daniel Quinn is an investment enthusiast who blogs on Investment Training.