Why Have the Returns on U.S. Treasury Bonds Decreased?

Investors all over the world have recently witnessed a drastic decrease in U.S. Treasury bond returns. Within the last five months, the returns on 10-year notes decreased from 4 percent annually to approximately 2.5 percent annually, their lowest point since December 2008. Additionally, the returns on 30-year notes have decreased from approximately 5 percent annually to roughly 3.5 percent annually.

Clearly these decreases are relatively large, especially when taking into account that the returns on these bonds have lost approximately a third of their value in each issuing. The reasons behind these decreases are concentrated in a few factors that can be summarized as follows: the drop in interest rates on the U.S. dollar and the fears of a shrinking U.S. economy in the future; the fears over mishaps in Europe and in the policies of the U.S. federal government over the setting of what is known as “quantitative easing”; the uncertainty experienced by the world economy in the upcoming period; and the search for safe havens far from these dangers.

Despite the lowering of interest rates on the U.S. dollar as the main catalyst for increased investment in the U.S. stock market, it has not been successful in enticing investors. Most investors have come to prefer treasury bonds over stocks, which means they have accepted significantly lower annual return rates for many years to come with limited risk. Therefore, investors have refused high annual returns that are not guaranteed in the stock market and are accompanied by relatively high risks. The result has been an increased demand for U.S. Treasury bonds, which has subsequently increased their value in the market, and has led to a decrease in investment returns — a natural result of the inverse relationship between the value of bonds and their returns.

Unfortunately, there is no doubt that this carries with it negative implications, as returns on assets in general — regardless if they’re publicly held stock, privately held stock, real estate, government issued bonds, currency or other assets — have decreased to a large and tangible degree in the current year of 2010; herein lies the problem. For example, it has become increasingly difficult to find an investment in privately traded stock that would yield an expected return of over 15 percent annually. It has even become difficult to find a return that exceeds 10 percent annually due to the speculation in the stock market.