Prediction Update : US Yields stayed low

In August 2011 I predicted that, against cries of hyperinflation and debt crisis in the US, yields would stay low.

Specifically, I said:

Prediction: If the US debt is downgraded in the next 6 months, yields won’t increase by more than 0.2% 6 months after the downgrade. In other words, there might be a small, temporary uptick, but within 6 months yields will have returned to below 0.2% above the day before downgrade.

S&P downgraded the US a few days later on 5 August.  Yields on 10 year US bonds were 2.56%, Currently, US 10 year yields are just below 2.00%. Clearly, 6 months after the downgrade (and at every point in between) US yields have stayed low, well below the upper limit of my prediction.

If you were still listening to the “obviously” right concerns over high inflation from quantitative easing and relaxed monetary policy in the middle of a huge liquidity trap and massive reduction in private spending, it’s time to reset your views.

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

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  1. Whats happening is that the Fed is suppressing rates and distorting the market. Natural mechanisms which would spur increases in rates are not being allowed to function. This sends the wrong signal and numbs people to the significant risks that are out there. This is playing with fire.

    1. Interest rates in countries with their own currencies and limited risk of default are ALL low. This isn’t about the US Fed, this is about a liquidity trap created through massive exogenous decrease in private investment driving down equilibrium rates to be negative, which markets can’t work with.
      What is this natural mechanism that wants a higher interest rate?

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