US Treasury yields plummet despite debt spat

The 10-year US Treasury yield has fallen very sharply since the end of the second quarter. The principal reason for the drop appears to be a reassessment of the prospects for monetary policy in light of the slowing economy. It has come as a surprise to some that Treasuries have weathered the debt spat in the US so well. But the debt spat has focused investors’ attention on the need for fiscal tightening, which should act as a drag on the US economy for many years, keeping interest rates and government bond yields low. We continue to expect the 10-year Treasury yield to end this year at around its current level of 2.5% – and to stay there or thereabouts over our forecast horizon through the end of 2013.