Here we go again

Low yields: The economic signal from US Treasury yields is either bad news or broken. By the usual logic, a drop in 10-year yields below 3 per cent is a grim economic omen.

In an eerie echo of the same period last year, Treasury yields have been steadily declining for more than six weeks, pushing them below the earlier 2011 nadir that came in the wake of the earthquake and tsunami that hit Japan in March.

But intuitively yields should be heading higher. The US economy is improving, albeit sluggishly. And the Federal Reserve's $600 billion shopping spree in the Treasury market, its second bout of so-called quantitative easing also known as “QE2”, is due to end this month.

It's true that a recent batch of economic data has suggested a softening of the recovery, including Wednesday’s anemic ADP employment report which foreshadows the official version on Friday. Continuing woes in Europe are also alarming investors. If yields follow last year's trajectory and go lower still, some will anticipate economic weakness and calls for the Fed to launch “QE3” will get louder.

But low interest rates, maintained by such money-printing, seem to be losing their ability to juice the economy. Consider, for example, mortgage refinancings.

Falling yields usually lead consumers to refinance their home loans at lower rates, giving them more money to spend.

This time around, borrowers lucky enough to have enough equity left to support a new mortgage seem to have refinanced already. Refi activity actually dropped in the Mortgage Bankers Association's latest weekly report.

That kind of data point should give Ben Bernanke and his Fed colleagues pause. They figured QE2 would have only a modest effect on the economy but thought that, along with the boost cheap money gives stock prices, it would do enough good to be worthwhile. Any QE3 program would have only a far flimsier rationale. In fact it may be that the Fed's huge interventions and ongoing crises abroad have flooded away the usefulness of indicators like Treasury yields.

If falling yields are signaling further US economic weakness, that's bad news for jobseekers, homeowners, and stock investors.

On the other hand, if the market is just malfunctioning, low yields may be masking incipient inflation — while also making the high level of US government borrowing seem less troubling to policymakers than it should. Neither interpretation is comforting.