Wondering how everyone here would explain the long end of the US curve. Flattening due to technical factors like demand for long dated assets to match pension fund liabilities or is it a comment on the slowing US economy and an increased probability of a recession. Personally I dislike theories which discount the shape of the curve as due to technical issues...

Supply/Demand (call them "technical") factors really are it: if you have 10-year liabilities, you buy a bond portfolio with 10-year duration. That demand can keep long rates down until the boomers retire.Another view I tend to like is explained in Roger Bootle's book The Death of Inflation, which inspired me to wonder if a 4% 10 year is also a vote that US inflation is dead.Personally, I love term structure theory.

One school of thought says that higher oil prices act as a tax on the entire economy, keeping a damper on inflation and inflationary expectations over the longer term.This is consistent with an increased correlation since the recent runup in oil prices between between lower yields and higher oil prices and lower oil prices with increased 10-year yields.There's also a lot of merit in those analyses which describe the sharp downward spikes in inflation due to global surpluses in labor, depressed commodity prices generally and Moore's law bringing down the cost of computing and boosting productivity.Matthew

Essentially, you can disaggregate the nominal yield into two components1. the real rate of return2. the inflation premium.Historically, it has been estimated that the real rate of return that investors require is 2%. This means that the inflation premium for 10 yrs in the US at the moment is roughly 2%. A number of commentators have suggested that inflation in the US is running far higher than the headline number suggests. For example, Bill Gross from PIMCO wrote an excellent piece on hedonic adjustments which is well worth a read. The impact of higher oil prices has been to act as a tax or wealth transfer out of the US and has been an effective break on inflation. The weaker dollar has probably caused the cost of imports to be higher but this has been muted due to the fact that some of the major trading partners with the US have pegged their currencies (explicity or implicity). The action of the foreign central banks has been to buy $ and use the $s to buy treasuries in effect funding the budget deficit. This has put a bid into longer term treasuries.You can either subscribe to the deflation or disinflation theory (Chinese workers are cheap and chinese goods will swamp the earth therefore inflation is dead) or you can subscribe to the infaltion is far higher (the cost of haircuts, univeristy fees, medical costs, service in restaurants etc). At the moment, the market seems to be content with the FEDs policy of gradualism although how long this is going to last for is anyones guess as the FED policy is not set in stone.perhaps this doesnt explain the shape of the curve but it gives you some of the current macro factors.

Dollar's strength has helped sentiment towards bond. Macrowise, Homeland investment act and budget talks are helping the currency. The cycle goes like this: dollar strengthening flattens the yield curve, which in turn strengthens the dollar. The cycle has to run its course until either Fed signals a stop, price inflation becomes evident, or asset bubbles are pricked.

daveangles right about bond yield breakdown.But the real rate of return can also be inferred from index linked. This is less than 2% p.a. in the UK and interestingly when you look at the history, fell to this level from about 4 %p.a. in about 97, just after labour came to power, and the bank of england was made independent. Some people interpret this as a market implied (real?) gdp growth projection.Then the inflation premium (or breakeven inflation rate) is the difference between the real yield on index linked and gilts. This would be about 3%p.a. in the UK. Some people interpret this as a market implied inflation projection.

The FT is all over this today. Interesting view from JPMorgan - that yields are being held down by speculators who think there is going to be growing demand from the pension funds, and they think that demand is overstated.Although there is pretty heavy legislation on pension fund holdings in Europe, there is nothing but talk in the UK and US. And just because you should discount liabilities with bonds, nobody has yet managed to convince me that that implies bonds are the best investment strategy, regardless of what Modigliani and Miller had to say on the topic.......I just thought of another on for the actuary baiting thread......

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