Bond Yields in the Noughties Compared to the Nineties

December 21, 2009

As the current decade winds down, the ten-year minus two-year yield curve has lengthened to a record width and is up 136 basis points since the end of 2008.  Nonetheless, the ten-year yield of 3.67% remains 78 basis points below its decade average of 4.45%.  Likewise, that average for the present decade of the noughties is 220 basis points lower than the 1990s mean yield of 6.65%.  Low inflation doesn’t come close to explaining the extent of this reduction in sequential decades.  U.S. CPI inflation averaged 2.94% per annum in the ’90s and 2.58% per annum in the ’00s short of the final month of data. 

German bunds and JGB’s behaved similarly to Treasuries this decade.  Ten-year bund and JGB yields averaged 4.16% and 1.45%, down 231 basis points and 240 basis points from their 1990s averages of 6.50% and 3.85%.  In contrast, British ten-year gilts posted average yields of 8.18% in the 1990s and 4.64% so far in the noughties, a comparatively deeper drop of 354 basis points.  Someone ought to point this out to Ron Paul and the other congressmen who want to knock Fed independence down several notches.  No doubt, Britain’s large reduction reflects the fact that the political government and not the Bank of England had jurisdiction over interest rate policymaking until May 1997, roughly three-fourths of the way into the ’90s.  As in the United States, ten-year bond yields in Germany and Britain are still quite a bit lower than their noughties’ means at 3.19% and 3.86%.  The present JGB yield is just 22 basis points under its decade mean level, however.  Japanese rates are already very low.  If they were 78 bps less than their decade mean as gilts and treasuries happen to be, the resulting 0.67 ten-year yield would be under 1% for the first time since 2003.  But Japan has the worst public finances of any top advanced economy with debt twice as big as GDP, and so the high government bond yield at present relative to the noughties mean could also be a sign of fiscal distress and market rebellion.  With deflation as high as ever and the risk of a double-digit recession hanging over investors, a sub-1% yield would not be unimaginable if the budget were in good shape.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.

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