A 10-Year Treasury Note is paying 2.6%. What does this mean?

[Kurt_and_Hunter]

The combined opinion of everybody in the world is that it is a fair deal to trade cash money for a US bond that pays 2.6%/year for ten years. (Constant Maturity Rate)

What is being predicted for the next ten years? (And what is not being predicted?)

Last year the 10-Year reached over 4%.

What has changed in the collective thinking of the world since then?

Discuss.

[Xipe Totec]

1. What's a saving's account paying these days? 1%?

Or keeping cash in a mattress, that's 0%.

Compared to that, 2.6% looks pretty decent.

[pitohui]

7. way less than that

savings/money markets are paying tiny fractions of a percent, you lose money after you pay taxes on your "earn"

[The_Casual_Observer]

2. It's no wonder that Action Comics #1 sold for a million dollars recently.

Comic books are apparently a safer bet than treasury bonds.

[geek tragedy]

3. For us financial ignoramuses, does that translate into an anticipated

2.61% inflation rate?

[Kurt_and_Hunter]

4. I would think somewhat less than that.

When you buy the bond you are locking in a prediction so you want to be fairly sure you're in good shape.

The loss risk on the value of the bond is presumably greater on the inflation side than a gain on the deflation side.

So I would guess that inflation at or under 2% is being predicted for the decade.

But I was, and remain curious to see what people say, though. There are probably some bond experts hear-abouts who could quantify what is really being predicted.

(There are other issues, like flight to safety... there is a hedge against calamity built in also. But those calamities would also be bad for global economic growth.)

[pitohui]

9. no not really it actually means you're losing money to inflation

you are never guaranteed a positive return after taxes/inflation

in the important areas, such as health care, we have seen double digit inflation year after year, so it depends on why you're saving this money -- assuming you are saving it for medical emergencies, you actually lose money over time to inflation but i don't know what else you can do, they keep moving the goalposts and having nothing in event of an emergency isn't a good strat either

i've had times when my i-bonds were paying 0 % yet there has never been a quarter since i started investing that "important" expenses haven't been soaring in cost -- grocery costs in new orleans have doubled since katrina, for example, health care sees double digit increases every year...i guess if all i do with my money is buy hookers and crack then i-bonds, treasuries etc. would be a decent investment after inflation...but for real people they're a loser

trouble is, all investments are losers right now

[Hannah Bell]

14. no. it translates into no growth, deflation, & more layoffs.

[madrchsod]

5. it means my adjustable mortgage dropped to 3%

which means my bank is`t making a dime off of my loan.

what it means depends on what side of that figure one is...i like it but my bank sure in the hell does`t

[pitohui]

6. it's a mature economy

you just aren't gonna be able to get the returns on bonds/CDs/treasuries going forward into the future that you had in the past -- see under japan, returns crashed and have never gone up again and won't in our lifetime

bonds/CDs/treasuries are no longer a safe way to make money, they lose a little to inflation, they are just a safer place than a mattress that will get swept away in the next hurricane or california wildfire...

and that's all they are

you take no risk, you get no gain, it was prob. something of an anamoly that we ever made money w. this type of investment, although i'm only a little bitter that it has collapsed as a money making opportunity at the same time i'm getting old and the stock market too will never again gain much over inflation (same reason, we have a mature, not a developing economy, so the stock market can't grow, it can only wander around over time, if you believe in fundamentals)

[Curmudgeoness]

10. Your line of thinking means that you will have to find a

developing economy to invest in. That is what it is saying to me. You will have to move your investments out of US companies and into other markets. Don't ask me which ones, because I am a scaredy cat.

[Art_from_Ark]

15. Returns crashed in Japan for a variety of reasons

Of course, Japan's economy has matured and there is somewhat less demand for capital. However, there is also a huge amount of private savings in banks and postal accounts, so there is almost no incentive to increase interest rates on savings. Also, those of us who have had money in Japanese savings accounts have been unwittingly helping to pay off the debts from the banking crisis-- the interest that would have gone to us was diverted to help bail out insolvent banks. It got so bad at one time that 6 months of interest on a $30,000 savings account would have been barely enough to buy a can of soda pop from a vending machine. And to add insult to injury, the government took (and still takes) 20% off the top for taxes.

[msongs]

8. it means there is hardly any competition between banks to get depositors nt

[Lucky Luciano]

11. It means fears of the recession continuing and for deflation to become a reality.

Check Japan's 10Y and 30Y rates....way lower than ours....Germany's bonds are also a good deal below ours.

The difference between our rates on the 3 month and 10Y as well as the 2y and 10Y and the 10Y and 30Y is still extremely high in absolute terms.

Given that Fed Funds are expected to stay near zero for an "extended period" and Bernanke has pledged to buy mid to long term treasuries using the prinicipal payments on the mortgage securities they own gazillions of, I would expect short rates to stay near zero and 10 to 30 Y rates to continue coming down - that means that due to the convexity of bond prices at such low rates, the price of the bonds should rise very fast. The 30Y rates are around 3.65% - they could conceivably come down to 2.5%. The total return on the long bonds inclduing the capital gains and coupons could be on the order of 20-25% in such a scenario. That is what people are playing for when buy bonds with these seemingly low rates - they are really betting that the curve will flatten and that cap gains will be significant.

The retail investors moving many billions each week out of equity mutual funds and into bond mutual funds are also playing a role here.

Inflation risks are very very low. Treasuries are a good deal...there could be some rate volatility, but the trend will remain to the downside in my opinion.

SERIOUSLY:

See also the following economist's FREE newletter (whom I agree with more than any other though he leans right and has a free newsletter):

David Rosenberg of Gluskin Sheff:
https://ems.gluskinsheff.net/index.ncl.html

The archives go back a few months - if you read all the pieces that he wrote since August 1 - or even July 1, that would be worthwhile to read. I have been reading him since April or so every day.

He quit Merrill (where I used to also skim his note, though not as carefully as I do now) when the TARP bonus issue came about. As I said, he does lean right, but is mostly apolitical and loves to quote Krugman and agrees very much with Krugman. I think he disagrees with Krugman's ideas on how to fix things though.

[TheKentuckian]

12. I suspect it means some bankster is making a profit for borrowing money at or near zero

While driving the nation into debt.

Also, that almost no growth is expected.

[dimbear]

13. To table a tautology, it means banks are not lending.

The question is "why is that?." "Because they don't expect to be paid back."

That is, banks are not confident that individuals and/or corporations provided with financial backing can fund a profitable venture with the borrowed money.

Banks see the future as a black hole.

Lucky for us they are pessimistic bastards.