The historical average yield for the 10-year Treasury for the first eight years of the last decade, from January 2000 until December 2007 was 4.7%. The highest was in January 2000 at 6.8% and the lowest was in June 2003 3.1%. For the seven months from the purchase of Bear Stearns in the spring of 2008 until the crash the following November the ten-year averaged 3.84%. Since the stock market recovery began in the spring of 2009 until today, the average has been 3.5%. This year the return has averaged 3.7%.
However, over the past week the yield has jumped from 3.7% to 3.86%. Bond traders must decide whether the recovery is strong enough to drive yields back to their historical average of 4.7%. Or to put it another way, with recovery underway, but hesitantly and with considerable doubt about the sustainability and the strength of the next few quarters of economic growth will the bond market make the rate assumptions of a normal recovery?
In a Bloomberg survey of 18 primary Treasury dealers, the predicted yield of the 10-year treasury at the end of this year ranged from a low of 3.25% to a high of 5.5%, but the average was only 4.2%. If the economy remains weak, and the Fed keeps extending its zero rate policy the remaining factor influencing the bond market is supply. The Federal Government is locked into an unprecedented amount of issuance. The Treasury cannot decide to change the amount of debt finance it must sell. This inflexibility is beginning to dominate the rate predictions of the bond market.