Moving towards Deflation as Yield curve flattens and Treasuries Rally

In a report published by Bloomberg, the Yield for 2 yr Treasury note fell to a record low and 10 Year is at 16 Month low after manufacturing on New York region grew less than the forecast and foreign purchases of US debt climbed.

Report says, "Benchmark 10-year note yields fell 7 basis points to 2.60 percent at 10:38 a.m. in New York, according to BGCantor Market Data. They dropped as low as 2.579 percent, the least since March 2009, generic data compiled by Bloomberg show. The 2.625 security due in August 2020 rose 20/32 or $6.25 per $1,000 face amount, to 100 7/32. Two-year debt yielded touched 0.4882 percent, after dropping below 0.50 percent this month for the first time. The 30-year yield slid as low as 3.74 percent, the lowest level since April 2009."

Global demand for long-term U.S. financial assets rose in June from a month earlier as investors abroad bought Treasuries and agency debt and sold stocks, the Treasury Department reported today in Washington. Net buying of long-term equities, notes and bonds totalled $44.4 billion for the month, compared with net purchases of $35.3 billion in May.

The European debt crisis led investors to buy American government securities as a safe haven, while shying away from equities and corporate bonds. Foreign holdings of Treasuries rose by $33.3 billion.

At the same time, the report showed that China’s holdings of long-term Treasuries fell for the first time in 15 months to $839.7 billion, a 2.5 percent drop. Its overall Treasury position declined for a second month to $843.7 billion, the lowest since May 2009. The decline represents the first year- over-year decline in China’s Treasury holdings since 2001. The holdings peaked in July 2009 at $939.9 billion.

yield curve as of 2010-08-16

In one of my article, I said that 10 Year yield of US Treasury note were not moving down like the case of drastic fall in 5-Year and 2-Year yield and I expected 10-Year yield curve to start moving down sooner or later as US economy slows down further  (kindly refer to article: Unusual Trend of Yield Curve). This fall in 10-Year yield is indicative of the fact that US might be moving from recession to depression. Flattening of yield curve is associated with investors seeing further slowing of economy ahead. When Yield curve is moving up that means investors are expecting inflation as economy starts growing but a flat curve means investors are not expecting any growth in economy, hence no inflation.

Hitesh Anand

I am a post graduate from Newcastle University, UK. I like studying and analyzing economic data and financial health of world.

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