What Investors Need To Know About Record-Low U.S. Treasury Yields

Yield on the benchmark U.S. 10-year government bonds fell to its lowest level in history in the aftermath of the Brexit vote this week. According to Mohamed El-Erian, there are three things investors need to know about the unprecedented low-yield environment.

3 Little Things

1. Falling U.S. yields reflect more about the economies in Europe and Japan than they do about the U.S. economy.

“Traditionally, lower yields and a flatter yield curve in the U.S. are strong signals of an approaching recession – and in this particular case, they would be signaling a painful downturn, given how far yields have dropped and how flat the curve has become,” El Erian wrote. Instead, the huge demand for U.S. Treasurys is simply coming from bond investors around the world looking to escape negative rates in Europe and elsewhere.

2. Low yields will not be much of a boost for the economy.

They will likely put even more of a strain on banks, and El-Erian is concerned that low rates will drive investors to riskier alternatives to bonds that could result in widespread financial instability down the road.

Related Link: Japanese Investors Begin Taking On Exposure To Foreign Currency Debt

3. The Federal Reserve has some important and difficult decisions ahead.

“In addition to making interest rate decisions more complicated — including whether to hike this year — recent developments are likely to accentuate worries about the ability of macro-prudential policies and the regulatory apparatus to counter the mounting challenges to future financial stability and economic well-being,” El-Erian explained.

So far this year, the iShares Barclays 20+ Yr Treas. Bond (ETF) TLT is up 18.1 percent.

Disclosure: The author holds no position in the stocks mentioned.