Investors Worry about Market Deflation

The yield on the 10 year Treasury note dropped to its lowest level in 2013 to 1.62 percent as traders worry about falling prices. The most recent economic reports showed wage pressures were less than half of what the Federal Reserve sees as acceptable. deflation

The new reports showed that the economy is slowing down. There was a pullback on hiring, a decline in construction spending, and a slowdown of manufacturing growth. There were also indicators that falling prices were still a risk in Europe. Most of the economies in the Eurozone are still in a recession. In China, traders were concerned about the economic outlook as manufacturing fell sharply in April.

Fixed-income traders will accept lower yields in time of price drops. The weak economic news has led to that conclusion. By the end of the trading session, the yield on the benchmark 10 year Treasury went up 1.64 percent. But in the past few days, the yield has been following and heads into the 1.4 percent mark, which is a record low it reached in July. That was the time when fears about the Europe debt crisis peaked.

Falling government bond yields have pushed major commodity prices lower. The price of crude oil dropped to just over $90 per barrel Wednesday before it closed at $91 per barrel. The price of crude oil has been above $94.50 per barrel in the past two days.

Gold prices dropped more than $20 to $1,451. The precious metal was trading over $1,800 per ounce less than six months ago when people were concerned about the Fed’s stimulus policies and the economy was recovering.

The Fed’s mandate is price stability and economic. That meant ensuring inflation doesn’t take off. Despite the aggressive stimulus actions in the past few years, the Feds have to focus on preventing a period of deflation or the drop in prices.