Thursday, December 18, 2008

Long Term Treasury Yields: How Low Is Too Low?

Yields on the 10 year Treasury bond have fallen by nearly 20% in three days. Yes, these are unprecedented and historic times.

As yields have fallen, many observers have wondered: "How low is too low?" It just doesn't seem plausable that investors would pay for a longer term bond yielding such paltry returns.

Of course at some point in time, this move in yields will exhaust itself. It would not surprise me if we are coming close to that point. Figure 1 is a monthly chart of the yield on the 10 year Treasury (symbol: $TNX.X). As you can see, yields are approaching the bottom end of a trend channel that has been in place since 1987.

Figure 1. 10 Year Treasury Yields/ monthly

So to answer the question: How low is too low? It doesn't seem that yields will go much lower.

In recent posts, I had stated that yields on the 10 year Treasury were prime for a secular trend change. That is still the case, but further analysis suggests and as I have stated several weeks ago, that possibility is still several months away.

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