The 10-year U.S. Treasury bond spent all of 23 consecutive trading days above the 2 per cent threshold before gravity took hold. On Tuesday, the yield slipped to 1.98 per cent, down 7 basis points, as investors shredded the script on an improving U.S. economy and a stable European debt situation.
In other words, it's back to normal. The yield on the 10-year Treasury bond crossed the 2 per cent threshold in early March after investors began to consider an optimistic scenario – that the U.S. economy was entering a virtuous cycle of rising employment, consumer confidence and economic activity.
In fact, that scenario was so optimistic that some observers began to mull the notion that the Federal Reserve's commitment to hold its key interest rate at ultra-low levels at least through the end of 2014 might not be worth much. The yield on the 10-year bond rose to a high of 2.38 per cent by mid-March, making it look like the era of sub-2-per-cent yields was over.
An ongoing adjustment to last week's awful U.S. payrolls report is partly to blame. Employers added just 120,000 jobs in March, about half the gains seen in February and well below expectations. That has some people convinced that the strong job gains earlier in the year were nothing more than a reaction to the warm winter.
Meanwhile, the European sovereign-debt crisis has also flared up. This time, it's all about Spain, with the country's borrowing costs rising fast as investors lose confidence in the country's ability to bring down its high deficits and avoid a financial crisis.
And what about QE3? The Federal Reserve has already resorted to two rounds of quantitative easing – essentially printing money to buy government bonds and hold down longer-term borrowing costs – but has sounded disinterested in another round unless the economy takes a turn for the worse.
As Ed Yardeni of Yardeni Research noted on Tuesday: "The action over the past week suggests that investors want the economy to be weak enough so that the Fed will provide another round of QE, but not too weak. That's a very strange version of the Goldilocks scenario: Cold, but not too cold."
David Berman