Market surprise: 10-year note hits lowest yield of year

By Adam Shell May 5, 2014 4:30 pm

 

Remember all the talk about 10-year government bond yields shooting up this year, perhaps as high as 3.5%? Well, yields have gone in the other direction and on Monday touched 2.57%, a level that would mark the lowest close of 2014.

In early trading Monday, the yield on the 10-year Treasury note dipped to 2.572%, which compares to the lowest close of the year of 2.58% on Feb. 3, which coincided with the stock market’s low for the year. It ended the day at 2.61%.

But this was supposed to be the year yields went up, not down.

At the end of 2013, the 10-year yield was 3.03% and Wall Street was betting that yields would rise, powered higher, strategists theorized, by an improving economy and the Federal Reserve’s move to drain the financial markets of stimulus.

But instead yields are falling. If the 10-year-yield closes below 2.58% today, it will mark a new 2014 low. The next lowest closing level would be 2.54% back on Oct. 31. The benchmark government bond hasn’t closed below 2.5% since Oct. 23, 2013, when it closed at 2.48%.

There are a few theories as to why yields are falling:

1. Frozen-omics. Economic growth in the first quarter was an anemic 0.1%, the government reported last week. Bond investors, it appears, are not betting on as big of a spring economic thaw as stock investors are.

2. Ukraine. Politics is being overshadowed by guns, bloodshed and strife in the Ukraine/Russia crisis, causing investor angst and uncertainty. Geopolitical fears are making bonds, viewed as a haven, more attractive.

3. Low inflation. Consumer price inflation is well below the 2% level the Fed views as normal, which is friendly to bond investors, who don’t like their interest coupon being eaten into by rising prices for goods and services.

4. Flight to safety. Investors that fear a war between the Ukraine and Russia, as well as a stock correction in the USA, are taking less risk now to avoid potentially bigger losses later.