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The 'mystery' of falling interest rates explained

Daily Ticker

Global bond rates have fallen to their lowest levels of the year as central bankers signal their determination to get the world's largest economies out of their slumps, the Wall Street Journal reports.

Investors bought up U.S., German and British government bonds, driving the yield on the 10-year Treasury note to as low as 2.5% on Thursday (^TNX) -- the lowest in more than six months. Government bond prices, which move in the opposite direction of yields, rose.

Related: 'Bond King' tarnishes his crown: Gross is undermining PIMCO, Macke says

U.S. editor of FT Alphaville Cardiff Garcia says the decline in rates -- which lowers borrowing costs for mortgages and consumer and corporate debt -- is "kind of a mystery.... everyone expected them to go up this year."

Related: Stocks and bonds priced to have worst long-term performance in history

Garcia says part of the decline can be explained by a much slower-than-expected U.S. economy, which grew just 0.1% in the first quarter, and by a strong disinflationary trend in Europe and the ECB signaling it's poised to ease policy further.

But why are U.S. rates falling as the Federal Reserve pulls back on bond buying (from $85 billion a month to now $45 billion), which you'd expect to push Treasury yields higher?

Garcia says one explanation could be the expectation that the Fed will not tighten anytime soon. Although the central bank is paring back on quantitative easing, Yellen has indicated interest rates will remain lower than you would expect even when inflation and unemployment get back to normal.

Related: Fed admits it has 'some work to do': Nariman Behravesh

On that front, inflation data out Thursday morning reveals that U.S. consumer prices in April increased at their fastest rate in nearly a year, up 0.3%. Still U.S. inflation has been running below the Fed's 2% annual target and the latest data of modestly increasing inflation could serve to reassure central bank officials.

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