Why Bond Yields Matter? Record Lows in Treasury Yields!!
It is not reasonable to say the Economy is looking good when One Year US Treasury Yields are at new lows.The bond market does not lie. It is a lot closer to the the real economy where as the stock market is riddled with speculation and frequently becomes detached from fundamentals.
What does it mean that US 1 Year Treasury Bill yields are at record lows?
This means banks and the fed want cash they don't care about the yield. They need cash now!!!
Why do long Term yields gravitate towards Lower duration yields?
Long term bonds have a greater duration and are more volatile and subject to changes in interest rates. A low yield on short term bonds means investors are risk averse. What ever brings the short end of the curve down will eventually bring the long term yield down. If you look at the orange line on the bottom chart, the US 3 year yield. It looks a lot more like the 1 year yield. You need to keep in mind that a ten year bond has a long duration so it is affected more by high interest rates, as payments are made more amount of times.
Banks want these short term bonds because they need the returns from these bonds so they can pay interest on deposited money but more importantly to use as collateral for cash. With stimulus also arriving; money will need to be put in the M2 so banks will need t bills to create the supply for the stimulus checks. With yields this low in short term Tbills that means there is a high demand for them. If banks end up needing more cash they will also need more tbills because banks never just hold cash, that cash is stored in tbills. This increased demand have sent short term rates down. When investors in long term yields see that short term yields aren't rising they will realize that's where long term yields are headed.The CARES Act allowed for the Treasury General Account to raise the amount of liabilities they held to over 1,500 Billion. Janet Yellen has already said they will bring the TGA down to pre pandemic levels at around 600 billon. The only way the TGA can be unwound is by decreasing the amount of Tbills issued. This will cause a liquidity problem as shown by the collapse in short term yields. This will first affect the long term yield and then stock market just like what happened in March and April of last year.
The One Year Yield dropping to record lows is a very concerning sign for markets. If you are one of the people pointing to the yield on the long bond and screaming inflation need to see similar movement in the short term yield. So unless the short term yields rise a lot then the increase in 10 year yields is a dead cat bounce.
What does it mean that US 1 Year Treasury Bill yields are at record lows?
This means banks and the fed want cash they don't care about the yield. They need cash now!!!
Why do long Term yields gravitate towards Lower duration yields?
Long term bonds have a greater duration and are more volatile and subject to changes in interest rates. A low yield on short term bonds means investors are risk averse. What ever brings the short end of the curve down will eventually bring the long term yield down. If you look at the orange line on the bottom chart, the US 3 year yield. It looks a lot more like the 1 year yield. You need to keep in mind that a ten year bond has a long duration so it is affected more by high interest rates, as payments are made more amount of times.
Banks want these short term bonds because they need the returns from these bonds so they can pay interest on deposited money but more importantly to use as collateral for cash. With stimulus also arriving; money will need to be put in the M2 so banks will need t bills to create the supply for the stimulus checks. With yields this low in short term Tbills that means there is a high demand for them. If banks end up needing more cash they will also need more tbills because banks never just hold cash, that cash is stored in tbills. This increased demand have sent short term rates down. When investors in long term yields see that short term yields aren't rising they will realize that's where long term yields are headed.The CARES Act allowed for the Treasury General Account to raise the amount of liabilities they held to over 1,500 Billion. Janet Yellen has already said they will bring the TGA down to pre pandemic levels at around 600 billon. The only way the TGA can be unwound is by decreasing the amount of Tbills issued. This will cause a liquidity problem as shown by the collapse in short term yields. This will first affect the long term yield and then stock market just like what happened in March and April of last year.
The One Year Yield dropping to record lows is a very concerning sign for markets. If you are one of the people pointing to the yield on the long bond and screaming inflation need to see similar movement in the short term yield. So unless the short term yields rise a lot then the increase in 10 year yields is a dead cat bounce.
