While the stock-market turmoil has gotten the most attention, the ultra-low yields on safe, long-term bonds are a warning light that the coronavirus may have a serious, negative, and persistent effect on the economy
A trader working the floor of the New York Stock Exchange on Friday. Photo: David Dee Delgado/Getty Images As recently as November 2018, ten-year U.S. government bonds paid an interest rate over 3 percent. That yield gradually fell as the Federal Reserve shifted from a stance of hiking interest rates to cutting them. And in the last couple of weeks, ten-year bond yields have absolutely cratered, falling below one percent for the first time ever. On Friday, they even briefly dipped below 0.
Of course, there are other matters that long-term interest rates react to. Long rates are sensitive to moves in short rates — in particular, if central banks are expected to cut short-term interest rates in the future, that will tend to cause long-term interest rates to fall now. The Fed has already cut short-term interest rates by half a percentage point in response to the coronavirus crisis and it is widely expected to cut more over the coming months.
Tim Duy, an economics professor at the University of Oregon, offers a less alarming explanation for at least part of the interest rate move: Falling long-term interest rates will cause mortgage rates to fall. This is good news for home buyers, but it means banks have to prepare for existing borrowers to pay off their mortgages and refinance at lower rates.
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