As we’ve discussed previously, U.S. yields are being suppressed by low global yields (which increases demand for the relatively higher U.S. yields) as well as persistent demand from institutions and banks. But a lack of supply relative to demand is also having an impact. JP Morgan estimates that in 2015, global demand will outstrip supply by $400 billion thanks to stepped up purchases by central banks in Japan and Europe.
Still, we expect U.S. short-term rates to climb next year as the Federal Reserve initiates hikes in the federal funds rate. That said, the overall rise in yields is likely to be inhibited by: 1) low yields in the rest of the world, which encourage foreign buying of U.S. Treasury securities, and 2) the persistent imbalance between demand and supply. In short, while long-term rates are likely to rise next year they will remain low relative to historical standards.
Source: Bloomberg.
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. He is a regular contributor to The Blog and you can find more of his posts here.