Heard on the Street: Investors may be so conditioned to extremely low interest rates that they will be very surprised by where rates eventually go
It can be hard to make sense of why long-term U.S. Treasury yields are so low. But after so many years where yields were, in retrospect, too high, it is understandable why investors might hesitate to bet on them going up.
In theory, the 10-year Treasury yield is supposed to reflect what investors think the return on money continually invested at the risk-free overnight rate set by the Federal Reserve will be, adjusted for a “term premium”—the fudge factor investors build into the yield as insurance against the risk that their rate forecasts are wrong. Lately, yields have reflected investors’ view that the main risk to their forecasts is that they prove to be too high.
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