The yields on 10-year Treasury notes are at around 1.8 percent and could easily go much lower.
Just that sentence is enough to make some people's eyes glaze over. As far as macroeconomic indicators go, treasury yields are not as sexy, let alone as immediately meaningful as the unemployment rate or GDP, but this ever-shifting barometer is in some ways an important indicator of where the U.S. and global economies are and where they are headed. And its recent dips from the 2 percent range last month and well above 3 percent last year signal fears about economic prospects both here and abroad. So for those not glued to CNBC or the Treasury Department's yield curve site all day, here is what to look for:
What does it mean when a Treasury note yields 1.8 percent?
Buying a Treasury bond means loaning money to the U.S. government, and yields are the amount of return that lenders receive from doing that. Investors in Treasury bonds include pensions, foreign banks, private banks, and individuals. It means a return of 1.8 dollars annually per $100 of money invested.
How unusual is such a low yield?
It's just above the record low reached in September, according to Dow Jones Newswires. Yields ranged from 5 to 9 percent in the 1990s and 3-to-6 percent in the early 2000s. As recently as last year, they were often well above 3 percent.
Why do yields change?
As with any market, supply and demand are the forces at work. The higher the demand for government debt, the higher the price and the lower the yield. The Federal Reserve also influences yields by buying and selling Treasuries, not to mention by influencing inflation expectations.
So is a low yield good or bad?
Treasury yields can in some ways act as an indicator, signaling that investors foresee either a promising or a gloomy economic landscape.
"[Over a] very long-term time frame, Treasury yields are correlated with economic conditions. Better economic prospects imply higher yields. So you can read in a fairly negative economic outlook from the [current] yield environment," says Guy LeBas, chief fixed income strategist at financial services firm Janney Montgomery Scott.
That's in part because investors are wary of investing in other things, like stocks. "In general, Treasuries are seen as the safe alternative to risky investments," says LeBas.
One investment that looks risky right now is foreign sovereign debt, particularly from debt-saddled European Union countries. A decline in U.S. Treasury yields can signal that investors are fleeing from foreign debt investments and into safe, if not terribly profitable, U.S. Treasuries. Interestingly, the Wall Street Journal reports that Germany is taking the unprecedented step of selling zero-interest two-year bonds—a signal that fearful investors are in search of safe investments.
Another factor that can move yields is inflation expectations—stronger economic growth often equals higher inflation, meaning investors will demand a higher return on investment. So a low Treasury yield means that people foresee little inflation (and little growth).
Uh-oh. That sounds pretty bad.
Not necessarily. One upshot is low-cost borrowing—in the current environment, fantastically low-cost borrowing. Many other interest rates in the U.S. are connected to the 10-year yield. So a low-yield Treasury can mean businesses are enticed to borrow money, meaning that they will have more money to spend and, hopefully, create jobs and stimulate the larger economy. Likewise, it makes for low-cost mortgage borrowing, which may help nudge prospective buyers into a sluggish housing market.
But above all, it means low-cost government borrowing, meaning that the government is paying small amounts of interest on recently issued debt.
So that's good, no?
While a low yield might boost homebuying, there are fears that it could encourage the government to act irresponsibly.
U.S. Treasuries are widely seen as an ultra-solid investment. "We tend to think with U.S. government bonds the default risk is zero, so we ignore that most of the time," says Mitchell Petersen, chair of the finance department at Northwestern University's Kellogg School of Management. In Spain, where yields are over 6 percent, and Greece, where yields are an astonishing 29 percent, that's not true, he says.
Corrected on : Corrected on 5/23/12: An earlier version of this article misstated the amount earned on a Treasury note yielding 1.8 percent, which is $1.80 annually.