The Economist magazine featured an item of interest to
placemakers in the last issue, exploring the rationale for continued very low
yields for Treasury securities, to which bank financing and taxable municipal
bonds are linked. Higher bond yields,
which appear about the only possibility moving forward, mean higher cost of
capital for redevelopment initiatives.
The yield for a ten-year note from the U.S. Treasury is 4.10%
as of this writing, among the lowest levels in the last 45 years as shown. The yield of a bond theoretically reflects an
investor’s expectation of inflation, plus some evaluation of the risk that the
issuer of the bond will fail to repay the debt. As columnist Buttonwood points out in the Economist, simple combination
of these two factors do not lead us to yields at today’s low levels:
Consumers have been grumbling about the inflationary impact
of higher oil and food prices for a while. But bond investors have only recently taken fright, pushing the yield on
the 10-year Treasury bond above 4% on May 28, for the first time since the
start of the year. Even now, however,
the breakeven inflation rate [the difference between conventional Treasury
yields and a comparable security whose yield is indexed to inflation] on
five-year Treasury issues is just 2.4%…compare that with the 7.7% inflation
rate that American consumers expect over the next 12 months.
Buttonwood posits potential causes of this mismatch,
including bond analysts operating in absentia and the notion that bond
investors simply disagree with consumers’ expectations for inflation. His conclusion notes an analysts’ projection
for Treasury yields to increase by 2% to 3% in the next two or three years.
Although the world may not be about to return to the
excesses of the 1970s, the Goldilocks era is tapering off: the trade-off
between growth and inflation has deteriorated.
View the entire
article here, and for those of you particularly interested in bond market
behavior, visit the commentator at Accrued
Interest, also listed in the Blog and Website Forum on the right side of this
Source of graph data: Federal Reserve bank system