Forecast of the Near Future: Interest Rates Even Lower

Today yields on Treasury instruments fell even lower, with the 2-year T-note hitting a record low of paying just 0.55%. Can interest rates go lower? The government today announced that GDP grew at only 2.4% in the second quarter, which was much less than expected.

What does this suggest for the immediate future?
T-note yields are heading lower
First, the recovery isn’t as strong as the Fed had hoped, and thus we’re likely to see trouble in the next two quarters. That means that Treasury yields are likely to stay the same or go even lower.

Most all the leading economic indicators for the economy are pointing down, and with unemployment expected to stay the same over the next quarter, it seems over the short term we are just muddling through even with mortgage rates and interest rates at record lows to help stimulate the economy. That being the case and the Fed pledged to support the recovery every way possible, you can expect Treasury yields to stay even or interest rates to fall yet lower.

How low can interest rates go? Zero percent is unreasonable because then the Treasury could not manage its various other market operations, so as a practical matter you shouldn’t expect to see rates less than 0.25%. However, there is still some room for rates to drop, and for the short term many yield shoppers are locking in CD rates.


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