Treasury yields have fallen so far that real yields (i.e. bond yield minus expected inflation as implied by inflation-linked bond prices) are turning negative.


So who is buying Treasuries at these levels? Likely answer: leveraged buyers. The only way it makes sense to buy bonds with negative real yields is if you are funding your purchase with cheap money from the central bank, thereby making a decent return on your equity. This explains why the US banking system is still adding to its holdings of Treasuries — the trade is still profitable. 

Why are yields falling now? QE2 — because QE is a signal to the banks that rates really will stay low for an extended period. Conclusion: both real and nominal yields can fall a lot further.

Advertisements