2. Negative and very low yields aren’t confined to the short-end of the yield curve.
Even for those investors willing to go further out on the yield curve, there is little in the way of real yield. Real yields on longer-dated Treasuries are also well below their historical average. Since the 1950s, the yield on the 10-year Treasury has averaged roughly 2.5% above the rate of inflation. Today, the spread is close to zero and since late 2008, the average spread has been barely 1%. The reason long-term yields are so low: The Fed wants them that way. In recent years, the Fed had implemented numerous asset purchase programs to drive long-dated Treasury yields – both nominal and inflation-adjusted – well below their historical average.
Market Realist – Low yields forced investors to look for higher yields elsewhere.
The graph above shows the historical difference between yields on the ten-year Treasury (IEF) and the year-over-year, or YoY, inflation rate based on the CPI (Consumer Price Index). As you can see, the difference has been falling since the 1980s. When the Fed started the bond (BND) buying program—or QE (quantitative easing—during the Great Recession, the difference became negative. This was because the continuous buying put downward pressure on the yield.
Since then, the difference has barely been positive. In other words, ten-year US Treasuries have just about compensated investors for inflation over the last few years.
Read the next part of this series to learn why Treasuries are risky right now.