High anxiety, low yields: A key interest rate sinks to its lowest level since May 2013

NEW YORK, N.Y. – Traders rushed to the safety of U.S. government bonds on Wednesday, knocking a key interest rate to its lowest level since May 2013. It’s a clear signal of rising anxiety on Wall Street.

The rate on the 10-year Treasury note, a benchmark for home loans and corporate borrowing, sank as low as 1.78 per cent in morning trading before bouncing back to 1.84 per cent. When investors are nervous, they happily take little reward for little risk.

“The U.S. Treasury market is the largest, most liquid in the world, so in times of stress money flocks to the U.S. market,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia.

The drop in the 10-year Treasury yield reflects rising unease about the global economy. Slumping crude oil prices and a slowdown in Europe have stoked demand for U.S. government bonds, keeping long-term interest rates near historic lows. In the bond markets, yields fall as prices rise.

For investors, the one reliable comfort has been the U.S. economy’s strength. But even that came under question Wednesday when the Commerce Department reported that Americans pared back their spending in December. Retail sales fell 0.9 per cent, the biggest drop in a year.

“Many hopes were pinned on the notion that falling gas prices would open up consumers’ wallets in December, the most important month for holiday sales,” LeBas said.

As renewed anxiety swept through financial markets, investments and assets tied to economic growth sank and those used as hiding spots rose. Copper, iron ore and other commodities plunged, while government bond prices jumped, pushing Treasury yields down. The yield on the 30-year bond dropped below 2.4 per cent for the first time on record.

Low interest rates are a holdover from the 2008 financial crisis, when investors around the world sought safety in the Treasury market. Since then, the European debt crisis, sluggish economic growth and a slew of other troubles have kept investors buying Treasurys, keeping a lid on yields and foiling predictions that rates will rise to levels considered normal before the financial crisis. Over the past 20 years, the average rate for the 10-year is nearly 5 per cent.