Be careful reading too much in to low Treasury yields

Consider this a post oriented toward developing your market analysis skills in terms of being able to step back and understand the overall market situation, not just looking at the news and data.

Yields on the US 10yr Note broke below 1.50% today. The decline in that rate recently has generated considerable discussion and analysis from the talking heads on CNBC, etc. I suggest taking it all with a major grain of salt, though.

Consider this. Through it’s quantitative easing (QE) operations and Operation Twist, the Fed now owns a substantial chunk of the available long-dated Treasury securities. I’ve heard numbers like 70% mentioned. That means the amount of paper out there being traded is a fraction of what’s been issued.

Think about that for a minute.

By taking all those Treasury Notes and Bonds off the market, the Fed has created a situation where much less volume is required to move the markets. Do you think there is any less demand for Treasury paper out there? There probably is from the likes of China and other emerging market economies where trade surpluses have declined, but that doesn’t offset the supply squeeze created by the Fed.

So now think about what happens when the markets get nervous and shift into “risk-off” mode. Demand for Treasuries increases. This would lower yields under any circumstances, as we’ve seen in the past, but when you have a lot less paper out there to buy you get much more significant moves created by the same buying volume.

For this reason, I am cautious about reading too much into the level of yields from a historical perspective.

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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
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