US 10-year Treasury rates sunk to a yield of just 1.837% on January 14, 2015, this after hitting 3.03% on December 31, 2013, to which most pundits and mass media outlets predicted a 2014 10-year treasury rate to be approaching 4% at the end of calendar year 2014, instead 10-year treasury rates moved in the opposite direction almost for the entirety of 2014 and this decline has been precipitous for the start of 2015. Treasury rates are sensitive to a lot of economic news and global economic concerns, but undoubtedly the area of most concern as to why Treasury yields have gotten significantly lower in the United States over the last year, is the commodity pricing meltdown that has occurred over the last seven months, led by the precipitous fall of oil beginning in mid-June of 2014. Oil and its price, is by far the most important commodity in the world, its usage and availability throughout the world is absolutely critical for overall economic output and consequently when the price of oil plunges by over 50% in just six to seven months this will undoubtedly have profound effects throughout the world economy.
While there are a slew of economic factors that affect the 10-year treasury rate, first amongst them all, is the overall inflation rate both currently and going forward. Most Americans are use to the price of things going up, year after year, sometimes significantly, while at other times modestly, but this has not always been the case in America. For instance, during the great Depression, and in particular from the years 1927-1933, America went through a period of deflation, to which the years 1932 and 1933 saw prices sink at approximately 10% per year. There are two great and dangerous problems that deflation represents with one being that those that are indebted will be compelled to pay effectively significantly higher amounts of money back on their loans because while the debt service is the same, the money that is being paid back is worth more, meaning that in essence you are paying more in real terms on your debt. The second terrible problem of deflation is that when you perceive that the pricing for goods are getting cheaper, you will have less incentive to buy something today, or to spend money on capital investments today, because you are anticipating even lower prices, leading to lower overall economic activity and thereby to a recession or a possible depression.
The United States as well as other major countries, such as Germany, France, England, and Japan is currently in situations to which inflation is low, this inflation is anticipated to continue to be low, and all these aforementioned countries are concerned about the pernicious economic effects of deflation. The fact that each of each of these other countries also has 10-year treasury yields that are even lower than America is indicative that low 10-year treasury rates are not going away anytime soon. While many in America, are use to treasury rates at 4% and above and consider these rates to be "normal", the fact of the matter is, if you go back further in time, for instance, from the years 1935-1955, with the exception of a couple months each way, the 10-year treasury yield did not rise above 3% or fall below 2% during this entire 21 year period. This, in itself, is proof positive that treasury yields adjust to the economic times of the age, and in an era of low inflation, as well as possible deflation, there isn't any good reason to expect these yields to jump up to 4%, or even back to 3%, anytime soon.