Falling bond yields have been a fixture of global markets for decades. The yield on the 10-year U.S. Treasury note hit its lowest level ever in July. Yield on the 10-year Treasury note

20 % Sept. 30, 1981 15.819% 15 10 July 8, 2016 1.366% 5 0 1981 ’90 2000 ’10 Sept. 30, 1981 15.819% 15 % 10 July 8, 2016 1.366% 5 0 1981 ’90 2000 ’10 Sept. 30, 1981 15.819% 15 % 10 5 July 8, 2016 1.366% 0 1981 ’90 2000 ’10

Why Bond Yields Have Been Falling:

Weakening Outlook on Global Growth Global growth has been weak, reflecting factors ranging from aging populations to rising debt levels to heavier regulation. Forecasters such as the International Monetary Fund have been cutting growth projections in response.

Forecasts for the world's gross domestic product, change from previous year Forecasts are shown for the forecasting year and the next five years. Forecasts are made in April of each year. 2016 forecast for world GDP growth In April 2016 the IMF forecast the world’s GDP growth to be this year and in 2021 5.0 % 3.2% 3.9% 4.5 4.0 3.5 3.0 2012 ’13 ’14 ’15 ’16 ’17 ’18 ’19 2020 ’21 5.5 % 2010 forecast for world GDP growth 2016 forecast for world GDP growth In April 2010 the IMF forecast the world’s GDP growth to be year and in 2015 In April 2016 the IMF forecast the world’s GDP growth to be this year and in 2021 5.0 3.2% that 4.2% 4.6% 3.9% 4.5 4.0 3.5 3.0 2010 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 2020 ’21 5.5 % 2010 forecast for world GDP growth In April 2010 the IMF forecast the world’s GDP growth to be that year and in 2015 2016 forecast for world GDP growth 4.2% In April 2016 the IMF forecast the world’s GDP growth to be this year and in 2021 4.6% 5.0 3.2% 3.9% 4.5 4.0 3.5 3.0 2010 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 2020 ’21 2010 forecast for world GDP growth In April 2010 the IMF forecast the world’s GDP growth to be that year and in 2015 2016 forecast for world GDP growth 4.2% In April 2016 the IMF forecast the world’s GDP growth to be this year and in 2021 4.6% 3.2% 3.9%

Soft Growth Has Caught Officials by Surprise Even in the United States, where growth has been stronger than in Europe and Japan and steadier than in many emerging nations, bullish predictions have been mistaken, limiting the Federal Reserve’s capacity to raise short-term interest rates.

Median projections and actual ranges for the Fed’s interest-rate target In September 2015 Federal Reserve officials expected the interest-rate target to rise to... ...3.4% by the end of 2018 3 % ...2.6% by the end of 2017 2 ...1.4% by the end of 2016 1 When the projections were made: 0 Current target range: Sept. 2015 Dec. 2015 March 2016 June 2016 Sept. 2016 0%-0.25% 0.25%-0.50% In September 2015 Federal Reserve officials expected the interest-rate target to rise to... 4 % ...3.4% by the end of 2018 3 ...2.6% by the end of 2017 2 ...1.4% by the end of 2016 1 0 Sept. 17, 2015 Dec. 16, 2015 March 16, 2016 June 15, 2016 Sept. 21, 2016 When the projections were made: Current target range: 0%-0.25% 0.25%-0.50% In September 2015 Federal Reserve officials expected the interest-rate target to rise to... 4 % ...3.4% by the end of 2018 3 ...2.6% by the end of 2017 2 ...1.4% by the end of 2016 1 0 Sept. 17, 2015 Dec. 16, 2015 March 16, 2016 June 15, 2016 Sept. 21, 2016 When the projections were made: Current target range: 0%-0.25% 0.25%-0.50%

Inflation, Scourge of Bonds, Has Been Throttled Slow growth is helping to keep a lid on inflation around the Western world, which is helping to increase the demand for bonds.

PCE index, change from a year ago, seasonally adjusted 5 % Recession 4 Target inflation rate: 3 2% 2 1 0 –1 –2 2006 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 5 % Recession 4 3 Target inflation rate: 2% 2 1 0 –1 –2 2006 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 5 % Recession 4 3 Target inflation rate: 2% 2 1 0 –1 –2 2006 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16

Central Banks Are Desperate to Stimulate Growth These persistent shortfalls have engendered an increasingly robust response from rich countries’ central banks. Their policies have centered on large purchases of their own government’s bonds, an approach known as ‘quantitative easing’ or QE for its effect of increasing central-bank assets.

Central banks’ holdings as a share of government debt outstanding 40% Bank of England 30 Bank of Japan 20 U.S. Federal Reserve* 10 European Central Bank 0 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 40% Bank of England Bank of Japan 30 U.S. Federal Reserve* 20 European Central Bank 10 0 2009 ’10 ’11 ’12 ’13 ’14 ’15 ’16 40% Bank of England Bank of Japan 30 U.S. Federal Reserve* 20 European Central Bank 10 0 2009 ’10 ’11 ’12 ’13 ’15 ’16 ’14

Signs of Desperation: Negative-Yielding Bonds These government purchases have amplified the already sizable demand for safe bonds at a time when investors generally remain risk averse, reflecting the 2008 crisis and uneven economic growth. Some central banks have moved their policy rates into negative territory, resulting in further reductions in bond yields in those regions and boosting investor demand for higher-yielding debt elsewhere.

Ten-year sovereign debt yields that are now negative 5 % 4 3 2 1 0 Germany Japan Switzerland –1 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 5 % 4 3 2 1 0 Germany Japan Switzerland –1 2006 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 5 % 4 3 2 1 0 Germany Japan Switzerland –1 2006 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16

The Global Reach for Yield Negative yielding bonds in other countries make low-yielding U.S. Treasury debt relatively attractive, drawing more foreign buyers to purchase bonds here.

Percent of indirect bidding, a proxy for overseas demand, for each day the 10-year note is auctioned 80 % (Largest percent of foreign bidders) June 8: 73.6% 60 40 20 0 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 80 % June 8: 73.6% (Largest percent of foreign bidders) 60 40 20 0 2005 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 80 % June 8: 73.6% (Largest percent of foreign bidders) 60 40 20 0 2005 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16

Worries About Side Effects Many investors believe central-bank liquidity created by bond purchases, which helps drive down yields, is recycled by investors into stocks, helping drive recent gains in the S&P 500. Some worry the gains make stocks vulnerable to a sudden reversal in sentiment. S&P 500 Index and 10-year Treasury note yield

2400 S&P 500 index 1800 1200 600 0 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 6 % 4 10-year Treasury Note 2 0 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 2400 S&P 500 index 1800 1200 600 0 2006 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 6 % 4 10-year Treasury Note 2 0 2006 ’07 ’08 ’09 ’10 ’11 ’13 ’14 ’15 ’16 ’12 2400 S&P 500 index 1800 1200 600 0 2006 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 6 % 4 10-year Treasury Note 2 0 2006 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 2400 S&P 500 index 1800 1200 600 0 2006 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 6 % 4 10-year Treasury Note 2 0 2006 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16

The Limits of Low-Rate Policy Some fear that falling long-term yields risk becoming counterproductive. One fear is that by reducing the difference between short-term and long-term rates creates a flat or inverted yield curve (in which short-term rates are higher than long ones), indicating a recession is likely. What will this curve look like a year from now?