In the last couple of days alarm bells have been going off about a pending U.S. recession, based in part on news that the so-called yield curve has flipped: long-term Treasury bond interest rates are suddenly lower than short-term rates. Taken in isolation it is correct to interpret this as a sign of a recession: higher short-term rates is a sign of short-term uncertainty in the economy; the same uncertainty that drives up short-term rates will drive down long-term rates due to higher demand.
Investors clamored into the safety of U.S. government bonds, sending the 30-year Treasury bond yield below 2% for the first time ever and the 10-year Treasury note yield below 1.5%, a three-year low. Around 2:00 p.m. ET, the yield on the benchmark 10-year Treasury note, which moves inversely to price, hit a three-year low of 1.475%, while the yield on the 30-year Treasury bond was at 1.944%, after earlier falling to 1.941% for the first time ever. The 2-year Treasury yield was 1.467%, its lowest level since Oct. 2017.
Former Federal Reserve Chairman Alan Greenspan says he wouldn’t be surprised if U.S. bond yields turn negative. And if they do, it’s not that big of a deal. “There is international arbitrage going on in the bond market that is helping drive long-term Treasury yields lower,” Greenspan, who led the central bank from 1987 to 2006, said in a phone interview. “There is no barrier for U.S. Treasury yields going below zero. Zero has no meaning, beside being a certain level.”
Negative yields are confounding traditional fixed-income investors. Lenders traditionally were compensated for parting with their money, while borrowers paid to use that cash for some purpose. That’s no longer the case in many markets outside the U.S., with more investors coming to grips with the changing dynamics of global markets over the last few years ... more central banks embarking on policy easing has resulted in more than $15 trillion of negative-yielding bonds worldwide. Add in U.S. stock-market volatility that is prompting investors to scoop up Treasuries and the result is yields on benchmark U.S. securities racing toward record lows.
Now we are talking. Investors are anticipating the Federal Reserve returning to QE, but they are also factoring in that when this happens, it is going to be a massive QE. Zero interest rates will not do the job; the money printing that brings back zero rates will not suffice to monetize all the debt that the U.S. government is going to sell over the next couple of years.