The 10-year Treasury began the year at 2.45%, a very low level by historical standards. After all that transpired in 2017, the benchmark ended 2017 at almost the exact same level, 2.41%. The low-rate environment is not just a U.S. phenomenon, however; yields across the globe have been beaten downward by the trillions of dollars of liquidity pumped into the markets by central banks. Investors begin 2018 as they began 2017 – searching the globe for income.
We will be watching: In addition to keeping an eye on U.S. rates, we will be monitoring global interest rates as well. Investors will flock to where they see the best risk-adjusted returns. With U.S. 10-year Treasury rates hovering around the same level as securities in other developed countries with worse credit profiles, investors will continue to see U.S. government debt as an attractive source of income. This elevated demand will push Treasury prices up and yields down, likely putting a cap on how high U.S. rates can go while global yields remain so depressed.
Risks to our view: U.S. rates could begin moving significantly higher due to a material or perceived increased risk of owning U.S. government debt. The tax reform bill is projected to add about $1.5 trillion1 to the national debt over the next 10 years on a static basis, an event that could alter how investors look at U.S. creditworthiness in the long term.
1 Tax Foundation. https://taxfoundation.org.
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