Capping the last auction of the week and after a soft 10 yr yesterday, the 30 yr today was weak too. The yield was about 1 bp above the when issued and the bid to cover of 2.23 was below the 12 month average of 2.31. Direct and indirect bidders took about 70% of the auction which is about in line with the one year average. As this area of the curve is mostly driven by pension funds and insurance companies, it’s always tough to read too much into it. That said the yield of about 2.94% remains well above its level of 2.62% on the day of the election and the plunge low last July at 2.10%. It is though below the March high of 3.22%. The 10 yr yield is holding at 2.28% where it was just before the results.
Bottom line, I’ll say again that the debate over where longer term rates go from here is more than just a growth and inflation one. One must acknowledge the changing influence of the big central banks and their altered QE programs. US yields will be correlated to where German bund yields go for example no matter what inflation print comes our way here. Also, there once was a time not too long ago that the 10 yr US yield was around (give or take) the nominal GDP rate which was 3.5% in Q4 and might only be 3% in Q1. Who knows when, if ever, we get back to that but just maybe the path towards it begins when central bank balance sheets start shrinking. Whenever that might be. I remain of the belief that the July 2016 lows in global yields will never be seen again in our lifetimes.
This is a chart overlaying the nominal GDP growth y/o/y growth rate from 1981 to Q1 2000 (thus before all the central bank easing that took the fed funds rate to 1% in 2004 and of course well ahead of what went on after 2007) with the 10 yr US yield. You can see the relationship.