![]() Short-term interest rates are also expected to remain low, as bondholders appear pessimistic about growth prospects and the sustainable returns to capital in coming years. Inflation is low and expected to remain so, so lenders are not demanding higher returns to compensate for anticipated losses in their purchasing power. ![]() At present, all three components are helping to keep longer-term interest rates low. To explain the behavior of longer-term rates, it helps to decompose the yield on any particular bond, such as a Treasury bond issued by the US government, into three components: expected inflation, expectations about the future path of real short-term interest rates, and a term premium. Why are longer-term interest rates so low? And why have they fallen even further recently, despite signs of strength in the US economy? The recent renewed decline was unexpected by most observers, including me. For example, in the US, ten-year Treasury yields have fallen from around 3 percent at the end of 2013, to about 2.5 percent during the summer of 2014, to around 1.9 percent today. Moreover, further sharp declines in longer-tem yields have occurred over the past year or so. Figure 1 below shows ten-year government bond yields since 1990 for the United States, Canada, Germany, the United Kingdom, and Japan. Longer-term interest rates are quite low around the world.
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