Should we expect 2% 10-year Treasury yields for the foreseeable future? Here I give some reasons we might think so. First, QE3 ended in October of 2014, but yields have actually gone down a little bit since then. But even though QE has ended, the Fed continues to conduct open market operations, as the open market operations people are reinvesting interest earned on the bond portfolio (the coupons). In the chart below, I show M2 and excess reserves. Excess reserves did drop down towards the end of 2014, but is still very high. M2 is, naturally, at its highest point in U.S. history. As pseudo-QE continues, yields will probably stay close to their current levels.



We can also compare the U.S. with Japan. For a very long time, Japan has persisted with low rates. Their stock market has actually done reasonably well, but it’s rather common knowledge real growth in Japan has been lackluster. A big problem for the Japanese is the banking system, as it was (and may still be) plagued by non-performing loans and poor investments. It seems the U.S. may have a similar problem with banks, in the sense that very little new lending is happening. I’m still not clear if it’s a corporate demand problem or a banks-not-willing-to-lend problem, as I haven’t seen much research on this topic.

But here are two more graphs that worry me a bit. The first is the Japan 10-year Treasury rate coupled with the Nikkei, and the second is the U.S. 10-year Treasury coupled with the Wilshire 5000.




Based on the above graphs, it’s possible yields on U.S. Treasuries could go even lower. One of the consequences of this are to encourage yield reaching, and this is what I worry about personally. My investments are already riskier than I want, and are mostly outside the U.S. where I have less ability to assess risk correctly. That means by risk-reward ratio is higher than I’d like, leaving me more open to capital losses. It also exposes me to currency risk, which is more risk than I actually want.