Figure 14-3: Increases in total domestic nonfinancial debt drive the 10-year Treasury yield
With modest variations, the same cause-and-effect relationship between growth in total domestic nonfinancial debt and the Prime Rate shown in Figure 14-2 holds true here with the 10-year Treasury rate. It is also driven by financial market forces, primarily supply and demand for U.S. government debt.
Current Comment: The record low 10-year Treasury rate at year-end 2008 was the result of the “flight to safety” among investors in the teeth of the recent financial crisis. Dramatic increases in government borrowing in 2010 and after, together with a return to Y/Y growth in borrowing by consumers and corporations, may lead to an upturn in Y/Y growth in Total Domestic Nonfinancial Debt during the next few years. If this occurs, higher interest rates would likely follow by 2012 and 2013.
