The slowing US economy

US 10 year note and US 30 year bond, yields over a twenty year period ending April 2012

US 10 year note and US 30 year bond, yields over a twenty year period ending April 2012

The bond market can tell stories – but only if you listen. The chart above shows the yield on two US Government securities – the benchmark US Ten Year Treasury note ($UST10Y, red line) and the US Thirty Year Treasury bond ($UST30Y, black line) over the past twenty years. Clearly they are trading at long term lows, lows approaching those seen back in 2009 but what does it mean?

Bond yields encapsulate the views of investors who purchase the instruments. Investors have many alternatives for their funds, for example, commodities, stocks or bonds. Money clearly is flowing into bonds, to the possible exclusion of the other two asset classes and what is the message? Investors are predicting slower growth ahead. Let’s look at it objectively: the chart below shows how the US equity markets have rallied sharply off their March 5th, 2009 lows but no market goes up forever. Since March 5th the S&P 500 has risen almost 91% (including the recent falls).

S&P 500, weekly from March 5th 2009 to April 23rd 2012

S&P 500, weekly from March 5th 2009 to April 23rd 2012

The American economy is forecast to grow at a rate of between 2.2% and 2.3% for 2012. Respectable, but keep in mind The US economy grew at an average rate of 3.28% from 1947 to 2011. So the forecasts are converging with bond market yields to indicate The United States is entering a period of slower growth.

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