The yield on the 10-Year Treasury Note fell to 2.34% this week which is the lowest level in fourteen months. Heavy buying of Treasury bonds in an apparent flight to safety was a big reason for the yield plunge. A bigger reason may have signs of economic weakness overseas, mainly in Europe and Japan. Japan's economy had a very bad second quarter, which kept pressure on its central bank to keep monetary policy very loose. Japan's 10-Year yield is the lowest in the developed world at .50%. Bad economic news also came from Europe's three biggest economies. France GDP growth is stagnant, while Germany's contracted. Italy slipped back into a recession. Weak inflation news also increased pressure on the ECB to take more aggressive approach to monetary policy, which would include quantitative easing. Expectations of that pushed the eurozone bond yields to record lows. The German bond yield slipped below 1% for the first time in history. With eurozone yields plunging, that puts downward pressure on U.S. Treasury yields. Compared to Europe and Japan, U.S. Treasury yields are a relative bargain. It does seem strange to see global funds pouring into the safety of bonds at the same time that the stock market is trying to recover from its recent correction. Something doesn't seem right here. It's usually not a positive sign when Treasury prices are rising faster than stocks. The second chart shows a ratio of the T-Bond 20+year iShares (TLT) divided by the S&P 500 trading near a six month high. That doesn't seem like a vote of confidence in the market or the economy.
- John
