The chart above (click to enlarge) is my way of interpreting what the level of 10-yr Treasury yields means. The recent four-month decline in yields is telling us that the market has become very pessimistic about the prospects for economic growth. It's a mini replay of the six-month decline in yields that occurred last year (April-October), which coincided with the widespread belief that the U.S. economy was headed for a double-dip recession.
Contrary to popular opinion, the level of 10-yr Treasury yields has very little to do with the Fed's quantitative easing initiatives. There are still many people who think that the Fed's QE2 program has helped the economy by lowering the level of long-term yields, and/or by pumping up the money supply, and this was precisely the justification advanced by the Fed for adopting QE2 in the first place. The evidence, however, does not support this contention.
Complete Story »