• Investors in US Treasuries appear to be more concerned with political risk than with current economic trends.
  • International money placed in the US over the past five or six years now seems to be flowing elsewhere, especially to Europe.
  • This movement also seems to be captured in recent movements in the dollar/euro exchange rate.

From time to time, it is interesting to check out the yields on US Treasury securities to see what investors in governments seem to be building into the market.

Going back almost three-quarters of a year to the first of November 2016, we see that the 10-year government note closed to yield 1.831 percent.

Yesterday, the 10-year bond closed to yield 2.167 percent, a rise of 33.6 basis points.

What has accounted for this rise in the yield?

Breaking up this nominal yield into an expected real rate of interest and an inflationary expectations component, we find that there has been very little change over this time period in inflationary expectations.

In early November 2016, market expectations for inflation built into the 10-year yield stood at 1.753 percent. The inflationary expectations built into the market yield yesterday were 1.773 percent, an increase of just 2 basis points.

Inflationary expectations jumped after Donald Trump was elected president, primarily on the expectations that Mr. Trump was going to stimulate the economy through tax cuts, tax reform, infrastructure spending, and financial deregulation.

By December 1, 2016, inflationary expectations jumped to just above 2.00 percent and remained there through most of March 2017. However, in April and May, inflationary expectations dropped off and by June were back around the level they are now.

Inflationary expectations seemed to drop off for two reasons. First, it appeared more and more unlikely that Mr. Trump and the Republican-controlled Congress were going to be able to pass any of the fiscal programs this year…if at all. Furthermore, it seemed more and more unlikely that financial deregulation was going to take place anytime soon.