For the first time since 1995, the U.S. bond market is rallying on the assumption that the Federal Reserve has relegated inflation to a secondary concern because the central bank views a recession as a much greater threat to the economy. The bellwether 10-year Treasury note, which depreciated as its yield climbed at least a quarter-percentage point when the Fed began lowering interest rates in 1998 and 2001, won't be recoiling anytime soon after the Fed lowered its benchmark by half a point to 4.75 percent on Sept. 18, the first cut in four years. Instead, the 10-year yield will fall to 4.51 percent by year-end from 4.58 percent, according to the median forecast of the 21 securities firms that trade with the central bank. The bond market's unusual buoyancy is a consequence of the worst U.S. housing slump in 16 years, a slowing rate of inflation and the seventh weekly decline in short-term corporate lending to companies. The sudden convergence of these disinflationary forces helped make the third quarter the best for government debt in five years.
Credit Suisse forecast in January that 10-year yields would end September at 4.45 percent, compared with the median estimate of 4.73 percent by the 62 economists surveyed at the time. The firm now says yields will drop to 4.2 percent by March 31. The market is .25 to .5 worse in discount this morning.
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