Treasury yields continue to decline, including long-term treasury yields. It is easy to figure out why short- term yields are falling (Fed easing), but why long-term yields? Long-term yields usually respond to inflation expectations. As inflation expectations wane, yields fall. However, there is more than inflation expectations at work here. The Fed has stated that it may buy long-term treasuries to push mortgage rates lower. This has caused average life and duration estimates on mortgage-backed securities to decline as refinancing becomes an increased possibility.
MBS traders and large investors typically hedge by buying or selling long-term treasuries. As mortgage rates or rate expectations and duration falls, traders must hedge by increasing duration in their portfolios. They due this by purchasing long-term treasuries. How much of the expected Fed actions are built in to today's treasury yields remain to be seen, but it would not surprise me to see a 30-year government bond yield below 3.00%. Heck, that is only another 20 basis points.
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