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‘What’flation, 2Y Treasuries Yielding 67bps

June 25th, 2010 Michael McDonough

Inflation doves can look no further than near record low yields on 2-year Treasuries to squelch inflation hawks ‘premature’ concerns.  The 2-year yield is reflecting the fact that the recovery will remain lukewarm, with downside risks outweighing the contrary, essentially opening up hunting season on Fed hawks—already in small supply. While hawk hunting may be the primary fundamental driver behind recent yields another technical factor may also be playing a role. Chatter on the trading floor is indicating that, private sector deleveraging coupled with a slower pace of government debt issuance is leaving investors with fewer alternatives, helping push yields down across the curve. 

Over the near-term, negative sentiment derived from a housing market left out to pasture, issues in Europe, the gradual removal of government stimulus—a key crutch to recent growth— and a plethora of other geopolitical risks should keep yields and inflationary fears in check for the foreseeable future, while the risk of deflation and an eventual return to negative GDP growth remain all too real.

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