10 YR T-Bond Approaching 2.5%

fred_b | Aug 2, 2022 | 172 posts since 2022

The 10 YR treasury bond yield has been falling at a rapid pace over the past few weeks.

What does that portend with respect to CD rates <= 5 years? Should I be grabbing CD's at current rates right now?

I know short term yields can be rising while longer durations are falling. I just don't understand why the 10 YR and mortgage rates are coming down so fast. Sure it's partly because analysts are expecting a recession and for the Fed to stop hiking earlier than previously projected, but I'd sure like to understand this better.

Anyone want to offer an explanation? Thanks.

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Answers

CuriousDave | Aug 2, 2022 | 233 posts since 2018

It’s all about supply & demand for 10 year money. If too many businesses foresee a recession, they pare back their plans for long term expansion and for the borrowing they previously planned, driving down demand for long term funds. To induce those businesses - and potentially new ones - to borrow long term, the FIs will reduce long term borrowing rates. Businesses with shorter term borrowing horizons planning for harder times will still need the shorter term money to stay in business, will need to renew the short term loans they already have and may also need to focus more on shorter term planning at the expense of longer term. Meantime, if (as now) the FIs are awash with cash looking for borrowers, there will be an oversupply of money even while the Federal Reserve is trying to reduce inflation by raising rates to reduce the money supply by making money more expensive. The result is that the demand for shorter term money (such as 2 years) may at times surpass demand for long term and that in turn may temporarily result in higher rates for short term than for longer term, until they perceive light at the end of the tunnel. Ken reminds us regularly that there are economists who foresee recession when 3 month (rather than 2 year) Treasury yields are higher than those for 10 years, and based on that view we are not there- yet?

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