Interest Rate Update – December 2017

The current benchmark 10-Year Treasury is trading at 2.415% (between this year’s low of 2.061% and the high of 2.607%).  Why have long term interest rates remained low while the Fed continues to raise short term rates (the Fed Funds rate)? First, the 10-Year Treasury remains as an attractive investment to international debt investors who look at the U.S. Treasury Bonds as a “safe haven” investment. Second, many international debt investors see significant relative value in the U.S. Treasury Bonds, because the debt yields from other “safe harbor” countries such as Japan and Germany are significantly lower. Finally, the Feds trend of increasing short term rates is viewed by the investment market as a hedge against inflation. Inflation lowers the value of fixed rate debt over time, so the Feds “fight” against inflation increases investor demand for longer term Treasury Bonds. The result of the Feds recent actions is a flattening yield curve. This means that there is a small difference in yield between the 2-Year Treasury rate and the 10-Year Treasury rate.