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Does the Safe-Haven Aspect of the US Explain Declining Treasury Rates

Summary:
That’s what reader Ed Hanson surmises: Why are long term interest rate coming down. There is one obvious answer. The world sees the US as the safest and best place to invest with their bond holdings because of rigorous US economy brought on by the Trump administration with its tax and reduced regulation policy. Perhaps it is this circumstance of inversion that means it is not indicating recession, at least for the US. Just glance at today’s Economist for an alternative interpretation: Pakistan, Argentina and Peru have year-on-year increases in the ten year rate (no change for Egypt and Saudi Arabia). Every other country experiences a decline. So, as long term US Treasury rates continue to collapse, think “slowdown” rather than Trumpian triumphalism. Figure 1: 10 year-3 month Treasury

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That’s what reader Ed Hanson surmises:

Why are long term interest rate coming down. There is one obvious answer. The world sees the US as the safest and best place to invest with their bond holdings because of rigorous US economy brought on by the Trump administration with its tax and reduced regulation policy. Perhaps it is this circumstance of inversion that means it is not indicating recession, at least for the US.

Just glance at today’s Economist for an alternative interpretation:

Does the Safe-Haven Aspect of the US Explain Declining Treasury Rates

Pakistan, Argentina and Peru have year-on-year increases in the ten year rate (no change for Egypt and Saudi Arabia). Every other country experiences a decline.

So, as long term US Treasury rates continue to collapse, think “slowdown” rather than Trumpian triumphalism.

Does the Safe-Haven Aspect of the US Explain Declining Treasury Rates

Figure 1: 10 year-3 month Treasury spread, % (blue, left scale), and VIX (red, right scale), and economic policy uncertainty index divided by 10 (teal, right scale). Source: Federal Reserve via FRED, FRED, and policyuncertainty.com, accessed 8/15/2019.

Menzie Chinn
He is Professor of Public Affairs and Economics at the University of Wisconsin, Madison

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