The 'mystery' of falling interest rates solved

Its Mystery

(may 13 2014) Global bond rates have dropped to their lowest levels of the year 2014 as central bankers signify their determination to help the earth's largest economies out of their respective slumps, the Wall Street Journal stated.

Investors purchased United State, British & German government bonds, driving the yield on the ten-year Treasury note to as low as 2.5 percent on Thursday -- the lowest ebb in more than 6 months. Government bond prices, which transcend in the opposite direction of yields, went up.



United States editor of FT Alphaville Cardiff Garcia states the drop in rates -- which reduces borrowing costs for mortgages & corporate and consumer debt -- is "kind of a mystery.... almost every folk expected them to increase this year."

He states a portion of the decline can be explained by a slower than expected American economy, which increased by just 0.1 percent in the first quarter, & by a strong disinflationary trend in Europe & the ECB signaling it's poised to ease policy further.

But why are American rates dropping as the Federal Reserve pulls back on bond buying by almost 50 percent, which you would expect to push Treasury yields to the high side?

Garcia further states one explanation could be the projection that the Feds will not tighten in the nearest future. Even though the central bank is paring back on quantitative easing, an analyst has pointed out that interest rates will remain reduced than you’ld expect even when inflation & unemployment return to normal.

On that side, inflation data out a week ago shows that U.S. consumer prices last month went up at their fastest rate in close to a year, up 0.3 percent. Still United States inflation has been running lower than the Fed's 2 percent annual target & the latest data of modestly increasing inflation could serve to reassure central banker. 


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