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In June 2007, three months before the collapse of Lehman Brothers and the start of the Great Financial Crisis in earnest, the U.S. 10-year Treasury yield was at 5% before falling to a historical low of 1.39% in July 2012. Yields increased for a short time thereafter only to fall to another new low of 1.36% in July 2016.

Source: Bloomberg L.P. prepared by Cardan Capital Partners

Since the stock markets began to rebound, investors have expected large interest rate increases that never materialized.

Between 2009 and 2014, the Fed Funds rate remained below 0.25%. The Fed raised rates by 0.25% once in the years 2015 and 2016, three times in 2017 and another three times year-to-date.

As of today, the 10-year Treasury is trading with a rate of around 3.05% — after falling from a seven-year high of 3.24% in early November. Interestingly, it has still risen less than the Fed Funds rate. One factor grounding Treasury yields is the extremely low yield of government bonds in other countries. See the current yields of 10-year government securities:

Source: Bloomberg L.P. prepared by Cardan Capital Partners

Numerous factors weigh into the rate differentials between country sovereign yields, such as currency exchange rates, country-specific inflation, governmental and economic risks. That said, when Treasury bonds are paying a higher rate than foreign government bonds of equal or lesser quality, they may be attractive to yield-seeking investors who do not believe the dollar will weaken relative to the currencies of these other foreign government bonds.

We thought investors would find this of interest. It’s one of the factors that may sustain interest rates lower than expected in the U.S. Please look out for a more in-depth report from Cardan on interest rates soon.


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