What a 2% 10 Year Treasury Yield Really Means

Undoubtedly the record-breaking low yield on the US Government treasury security has caught the attention of most. Weather mortgage rates, car loans, or even the collaterally changed checking account rates, most understand rates are very low and have experienced this in one way or another. What is missed by many is the fact that low-interest rates are an excellent predictor of future growth.

In the bones of financial computations, just as 2 + 2 must equal 4, low interest rates, especially in the longer term maturities, such as the 10 year term are a predictor of future economic growth rates and inflation.

While a 2% long-term treasury yield, in financial terms, is predicting a slower longer term economic growth period for the United States this does not spell doom for the capital markets as this rate is also predicting a slower rate of inflation. Capital market growth is a function of economic growth but not entirely as there has been no proven correlation to economic growth and capital market returns, a subject for another day.

Here is an estimate of long-term stock market returns from my favorite NYU academic valuation professor Aswath Damodaran.

While the expected return is lower than that of the 70’s and 80’s, it is much higher than the return received over the last 10 years.

Bottom line, we would not be surprised to have continued slower economic growth, however capital market growth may not be inhibited terribly by this slower growth.

Have a Good Day!

JK

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