US 10-Year Bond At Highest Level For 10 Years Not Intriguing But 2-Year increasingly Lower Is

US 10-year bond at highest level for 10 yearsUS 10-year bond at highest level for 10 years
The interest on the US 10-year bond has reached 3%, its highest level in 10 years (blue line). There is nothing exceptional about this given that, as we can see in the graphic, expected inflation has also taken off. This can be seen in the rates on the 10-year Breakeven bond, which directly values the free risk of inflation as its capital is covered by the trend in the CPI over these 10 years (the red line).

What is intriguing is that, on the other hand, the spread of the 10-year bond minus 2 years, which reflects the expectations for economic activity, including inflation, is increasingly lower. This is because the interest on the 2-year bond increases faster than that on the 10-year bond. In any event, increasingly more subdued expectations for an economic recovery.



In reality, as John Authers highlights, the yield on the 2-year bond has indeed gone up, proportionally, more than that on the 10-year bond, from 1.6% mid-2016 to 2.44%.

In summary, we are faced with an intriguing situation, where a slowdown in GDP is expected, at the same time as an acceleration in inflation – fuelled by the prior rise in oil prices. Meanwhile, the 10-year bond, the most important one, is at worrying levels. Authers says:

The markets would indicate that investors are protecting themselves against future interest rate moves. But that the Fed will hold back on any rise in rates next year and then will reduce them in three years.

I have had to read these sentences three times to understand anything. But I believe the main contradiction is an expected rise in inflation with a expected moderation in economic activity. Not because inflation grows of its own accord, but because they usually advance hand in hand at moderate levels. But if what is expected is that the increase in the cost of energy is more of a brake than a stimulus on consumption and investment activity? Now that is understandable.


About the Author

Miguel Navascués
Miguel Navascués has worked as an economist at the Bank of Spain for 30 years, and focuses on international and monetary economics. He blogs in Spanish at: http://