The Yield Conundrum – Exploring Answers

By ,   January 16, 2015

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In 2014, the investment community was shocked by the further decline of U.S. interest rates.  As the Fed started pulling back stimulus, it was thought by many industry experts that yields would begin to climb back to a normal range.  However, the opposite occurred.  One speculative thesis is that rates are being held down by the purchase of U.S. Treasuries by foreign investors.  The logic is that even though rates are incredibly low from a historical standard in the U.S., yields are still higher than similar securities in other developed markets (like Europe).  

Let’s look at the net purchases of Treasuries by foreign investors over the last 10 years and compare that to the 10-yr Treasury yield…

Yields and Foreign Purchase Data

From the data, it appears the foreign purchases have little impact on yields longer term.  Even the dramatic spike in purchases from 2009-2010 didn’t cause a meaningful collapse of rates from the trend.  Still, from the start of 2014, the spike in purchases could certainly have affected the decline in rates to some degree.  However, I would surmise the correlation is somewhat spurious and the real reason(s) for the decline in U.S. Treasury yields lies elsewhere.