Treasury Outlook: A Closer Look

During expansions, five-year Treasury rates have historically tracked fairly closely to nominal growth, that is, growth not adjusted for inflation. In the long run, nominal growth and long-term rates tend to converge. While the correlation between the two is far from perfect, particularly in the short run, nominal growth expectations can provide a general guideline for our rate projections. Given … During expansions, five-year Treasury rates have historically tracked fairly closely to nominal growth, that is, growth not adjusted for inflation. In the long run, nominal growth and long-term rates tend to converge. While the correlation between the two is far from perfect, particularly in the short run, nominal growth expectations can provide a general guideline for our rate projections. Given the dismal levels of growth notched during the depth of the recession, our forecast is comparatively quite robust. It follows that rates ought to increase significantly over the same time horizon. Indeed, the 10-year Treasury yield will likely double from the lows of the recession to the end of 2011, due at least in part to much improved economic growth. The path of GDP growth has traversed across an extremely broad swath of territory, which is common when transitioning between economic cycles. Rates have done the same. Extremely low as the flight to safety trade was in play, they have since begun to normalize. In this paper, we will review growth, inflation and market fundamentals to determine what they reveal about future rates. Thank you for your interest in Wells Fargo’s Economic Commentary by Email. You are receiving this message because you have requested Economic Commentary information and updates sent via email. If you no longer wish to receive these emails, please click on the following link to access the Economic Commentary by Email registration page: http://www.wachovia.com/economicsemail.