Tags: Bernanke | interest rates | economy | inflation

Bernanke: Inflation Expectations, Term Premiums Help Explain Low Rates

By    |   Monday, 13 April 2015 06:11 PM

The recent decline in long-term interest rates has confounded many experts, including former Federal Reserve Chairman Ben Bernanke.

"Why are longer-term interest rates so low? And why have they fallen even further recently, despite signs of strength in the U.S. economy?" the Brookings Institution economist asks in his latest blog post.

The 30-year Treasury yield dropped to a record low in January, and the 10-year Treasury yield now stands at 1.94 percent, down from 2.17 percent at the end of last year.

"To explain the behavior of longer-term rates, it helps to decompose the yield on any particular bond, such as a Treasury bond issued by the U.S. government, into three components: expected inflation, expectations about the future path of real short-term interest rates, and a term premium," Bernanke writes.

"At present, all three components are helping to keep longer-term interest rates low." You probably are quite familiar with the first two factors, but what's a term premium, you may ask.

Bernanke's answer: it's "the extra return that lenders demand to hold a longer-term bond instead of investing in a series of short-term securities."

Meanwhile, Scott Minerd, chief investment officer for Guggenheim Investments, believes the low-rate trend will continue.

"The big question is will the overflow of negative yields in Europe push us to levels on interest rates in the U.S. that we think would be completely [unsustainable]," he told CNBC. "That's the risk."

In Germany, government bonds (bunds) with maturities of up to five years have negative yields.

"If 10-year bunds were to go to a negative yield, could we see 10-year U.S. Treasurys at 1 percent or lower?" Minerd said. "I wouldn't rule it out." Ten-year bunds currently yield 0.16 percent.

The dollar's strength will help attract investors to Treasurys, Minerd said. The euro fell to a 12-year low against the greenback last month and now stands at $1.0578.

The euro could fall to 80 to 85 cents this year, Minerd said. Given that scenario, "why wouldn't European investors continue piling into U.S. Treasurys?"

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The recent decline in long-term interest rates has confounded many experts, including former Federal Reserve Chairman Ben Bernanke.
Bernanke, interest rates, economy, inflation
Monday, 13 April 2015 06:11 PM
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