Real Yields
With yields on 10-year Treasurys more than doubling since reaching a record-low 1.379 percent in July 2012 and economists anticipating yields will rise to 3.4 percent next year, some measures indicate U.S. debt has become relatively inexpensive.
Inflation, which erodes the value of fixed-income payments, has been subdued in the U.S., potentially bolstering demand for bonds. Adjusted for consumer price increases, yields on 10-year notes are now 1.8 percentage points higher than the 1.24 percent rate of annual inflation last month, the most since June 2010, data compiled by Bloomberg show. As recently as February, real yields were negative.
Versus government debt in Japan, which holds more Treasuries than any foreign nation except China, real yields for the 10-year notes are the highest since 1998.
Demand will depend on “whether the yield advantage and the stable currency continues to attract money into Treasurys,” Jim Vogel, an interest-rate strategist at FTN Financial in Memphis, Tennessee, said in a telephone interview. “I don’t see the story changing that much that would drive people away.”
Term Premium
Based on its term premium, a valuation model used by the Fed that is calculated by using interest-rate expectations, economic growth and inflation, the 10-year note is the cheapest in more than two years. The gauge, which rises as a security becomes less expensive, climbed to 0.62 percent last week.
The gauge has averaged 0.21 in the past decade and was negative as recently as June 18, when the 10-year note yielded 2.19 percent, data compiled by Bloomberg show.
“These rate levels are more attractive than we’ve seen since 2011,” William O’Donnell, head U.S. government bond strategist at RBS Securities Inc., one of the primary dealers that trade with the Fed, said in a Dec. 27 telephone interview from in Stamford, Connecticut. That will drive demand and “temper any back-up from here.”
Direct Bidders