I do not believe that there is a term-structure puzzle reflected in interest rate behavior over the past year or so. Recent experience is unusual but far from unprecedented.

The current low long-term bond rate I absolutely do not view as a monetary policy failure.

The fact that the 10-year bond has not exhibited a persistent trend over the past 18 months or so while the Fed has been increasing the target fed funds rate by 200 basis points is not evidence that something is awry with monetary policy.  

If real growth and/or inflation depart significantly from current expectations, then we will see a persistent trend in the bond rate.

Interest rate risk can never be ignored.  We all know that the FOMC has moved the fed funds rate upward by 2 percent over the last year in a series of eight quarter-point adjustments. Yet over this same period, long-term interest rates have fallen.  It is incumbent upon management to position its balance sheet so as to protect the institution from the vicissitudes of the long bond market, whether long rates remain low or revert to a more common historical pattern.

The easy explanation [for why long-term interest rates are so low] would be that everybody thinks the economy is really going to go through a soft spot -- or others may say, well, the Fed is so tough on inflation that inflation will fall in the future...We're trying to understand if the market is trying to send us a signal, and is it a good signal?

The only time I would really worry about low long-term rates is if they push down to say, the levels Japan has seen the last several years...So the low interest rates we have here - if that's just what we have because the economy is basically foreseeing continued contained inflation, and we can supply liquidity through the banking
system and the capital markets, then that could be very positive.

I too share the concern that with rates having been so low for so long, that we do have some stretching for yield.

The pronounced decline in the US Treasury long-term interest rates over the past year despite a 200-basis-point increase in our federal funds rate is clearly without recent precedent.

One prominent hypothesis [to explain the narrowing gap between long- and short-term interest rates] is that the markets are signaling economic weakness.  This is certainly a credible notion.  But periodic signs of bouyancy in some areas of the global economy have not arrested the fall in rates.

The breakup of the Soviet Union and the integration of China and India into the global trading market...have permitted more of the world's lower-cost productive capacity to be tapped to satisfy global demands for goods and services.  Concurrently, greater integration of financial markets has meant that a larger share of the world's pool of savings is being deployed in cross-border financing of cost-reducing investments.  The enlargement of global markets for goods, services, and finance has contributed importantly to the favorable inflation performance that we are witnessing in so many countries.  That improved performance has doubtless contributed to lower inflation-related risk premiums, and the lowering of these premiums is reflected in significant declines in nominal and real-long-term rates.

Banks were not able to fully enjoy the benefits of growth in loans and securities, however, because banks' net interest margins narrowed further to 3.61 percent. Rising short-term interest rates, a flattening yield curve, competitive pressure on spreads, and rapid growth in assets funded with purchased money each played a role in the margin compression...This narrowing trend in margins bears watching, including the extent to which competitive pressures are playing a significant role. 

Long-term interest rates in the U.S. have actually fallen, despite the fact that the FOMC has tightened policy eight times over the past year. Several possible explanations of this have focused on global developments, such as increased purchases of government securities by Asian central banks and a worldwide excess supply of savings. But it is difficult to gauge the magnitude of these effects, and, as far as I am concerned, low long-term rates are still a “conundrum,” to borrow a term that Chairman Greenspan has used recently.

The Fed keeps raising interest rates even though it hasn't hit the long end. The more we raise at the short end, this long end, as the chairman has said, has given us a conundrum, but at some point we do believe the 10-year Treasury will rise above 4% and take mortgage rates with it.

In the long run, it just appears that long rates cannot stay at this low a level.