EconomicGreenfield

In at least two past posts on short-term Treasury yields, those of July 20, 2010 (“2-Year Treasury: Odd Occurrences”) and November 23, 2009 (“Two Notable Developments”) I have discussed the significance of the ultra-low yields seen on the 2-Year Treasury Note and the 3-Month Bill.

Here are updated charts of each, as of Friday’s close.

First, the 2-Year Treasury Note yield, shown on a daily basis, LOG scale, since 2008:

(click on chart images to enlarge)(charts courtesy of StockCharts.com)

The second is a chart of the 3-Month Treasury Bill yield, also shown on a daily basis, LOG scale, since 2008:

For the various reasons I wrote about in the two aforementioned posts, I continue to find these ultra-low short-term Treasury yields to be disconcerting.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1189.38 as this post is written

I have written of “odd occurrences” and their significance, most recently in the July 14 post.

The yield of the 2-Year Treasury is one example of these “odd occurrences.”  Here is a 3 year daily chart:

click on chart to enlarge image; chart courtesy of StockCharts.com

Plotted below the 2-Year Treasury yield is the price of the S&P500.  As one can see, the 2-year Treasury yield at .61% is now at a level less than that seen during the height of the Financial Crisis during Q4 2008.

While there are many reasons that can at least partially explain why the 2-Year Treasury yield is so low now, it is still what I call an “odd occurrence.”  Why, during what most believe is an economic recovery, with generally robust financial markets, would investors in the 2-Year Treasury accept such low yields?

Of note, this 2-Year yield has acted strangely in the past; I commented upon the dip in yield during November 2009 in this November 23, 2009 post.

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SPX at 1071.25 as this post is written

I would like to highlight two notable developments that have lately arisen.

Both have to do with interest rates on short-term US Government securities – the 3-month bill and 2-year note.

First, a chart of each of these securities’ yields.  Shown is a daily chart from January 2008 to the present, in LOG scale to show detail:

Charts Courtesy of StockCharts.com

As one can see, yields on each have fallen dramatically lately and now are near or at levels last seen during the height of the Financial Crisis during Q4 2008.  During that time, investors aggressively moved into these securities as they were perceived to be a “safe haven.”

The most common reason given for the recent yield movements on these securities is that there is high demand driven by needs for year-end portfolio adjustments and similar motives – i.e. the movements are “benign” in nature.

I do not necessarily concur with these “common” rationales, especially in a market environment where there have been myriad danger signals exhibited, of which I have previously written.  While I am not certain this drop in yields is due entirely to a “flight to safety” (i.e. as purported ”safe haven” securities) as in 4Q 2008, I suspect it is a least a major driver.

If indeed some or most of this yield movement is being caused by investors’ fears, it would be most odd in that these securities are reflecting heightened fears while a broad array of securities don’t appear to be reflecting such fears as measured by their price movements.

To illustrate, here is a simple comparison between the three month Treasury Yield and VIX (seen below in red) since 2008.  I will use VIX as a general “fear” proxy. Note the inverse correlation during 4Q 2008 and the lack thereof now:

Chart Courtesy of StockCharts.com

Another aspect of this dropoff in yields bears comment.  Why would a rather large class of investors settle for minuscule yields, at a time when major asset classes have done very well over the last few months?

“The markets” don’t always make sense – and this appears to be an outsized example…

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SPX at 1091.38 as this post is written