There are many whom have been preaching that rates cannot continue to be suppressed at the rate at which they have been for over the past year and continue to be. But why? No one has a really good answer to this question as far as I am concerned. However, I confess that I do not have a PhD in any discipline therefore, I am far from an expert in anything. I have heard answers ranging from they cannot continue on this path because banks cannot profit at these spreads to this is not feasible because investors will not lock money up for 10 or 30 years at rates less than whatever percent at that point in time.
Both, in my opinion, are lame excuses to the various and obviously incorrect theses that many so called market experts keep giving. The Federal Reserve owns ~40% of the outstanding supply of the the long end of the curve (10yr Notes and greater maturities) as has been discussed and pointed out various times, and can be verified by doing some simple research into what the US Treasury has issued and what the SOMA has purchased as well as what it will purchase in the current month. This is simple, however. There are many factors besides what the Fed is doing to extend the maturity of US debt that are causing rates to go down.
The world is experiencing a slow down in the rate of growth and the fact that China is in that camp is worrying. Hope for QE from the Fed and for the politicians in Europe to save the day are the only thing keeping many equity indices at bay from crashing. Nothing has changed in Europe and if anything they have gotten worse because the countries in question still have access to the debt markets and continue to issue paper. Interestingly enough the demand is not pure, as mostly domestic banks are the ones on the bid. A dangerous exercise indeed to say the least.
When fear strikes the equity markets and Spanish and Italian debt markets, yields of US Treasury’s get compressed as capital flows are in search of a safe haven. Obviously they do not care about what the yield is, if they did then yields would not be at the current levels. The global financial markets have become infected with empty promises which cannot solve any real problems. Investors can stash cash in a mattress if they choose to, but the reality is that some investors do not have enough mattress space to contain all the capital flow required so they buy into safe haven US Treasury’s, along with other safe havens of course, which shall continue to suppress yields.