Should Treasury Yields Be at 10%?

Here is something that you do not hear too often. 10% for treasuries are the right yield in the middle of this mess. Hmm. How does that work? Isn’t the whole point of bringing down yields to help with liquidity and spur on the consumer during a difficult economic downturn? Thoughts?

July 9 (Bloomberg) — Yields on U.S. Treasuries are being artificially suppressed by the Federal Reserve, otherwise bonds would yield more than 10 percent, according to Lee Quaintance and Paul Brodsky of QB Asset Management.

“Macroeconomic fundamentals imply longer-term Treasury yields should be priced above 10 percent,” the strategists wrote in a research report this week. “Investors are being forced to judge asset values in a hall of mirrors.” The CHART OF THE DAY tracks the yields on 10- and 30-year U.S. government debt in the past 14 years, showing that 10 percent yields haven’t been seen since October 1987..

Click chart to enlarge

Comments

[whidbey:]

We can see why TYX is where it is, the rate of issue is threatening to bond holders, but USB is denominated in US dollars which we know is a haven currency,( but not really safe currency given US liquidity and the world view of its value but a lovely myth).

Which should the bond buyer believe? One day yields will rise when Ben says "rise" and until then swallow the story that one day the Fed will come clean and remove the stimulus. It is not a bond market, its a hand maid of the political policy and a parking lot.

Jul 13 11:49 AM

[Mediocritas:]

Yes, central banks are buying up Treasuries en-masse, bidding up prices and keeping yields low. Typically they have a 'you scratch my back and I'll scratch yours' agreement to hide behind indirect sales in each others' territory. A recent rule change means the Fed can take 'indirect' status locally, an important emergency measure given the deflation event we face.

It seems that these guys from QB Asset Management haven't noticed that the shadow banking system is collapsing. Credit is evaporating at a rate never seen, creating an enormous deflationary pressure upon the economy. A big problem because the shadow-banking system is responsible for the lion's share of 'money' out there.

Central banks already tried to oppose this force by offering cash to member banks at 0% interest. It failed. So they started printing money and offering it at 0% and it STILL failed. It failed firstly because the traditional banking system is a smaller player than the shadow-banking system, and secondly because member banks are intertwined and exposed to the shadow-banking system. In many cases member banks thought they were in control, operating through trim tabs, highly leveraged...but as any pilot knows, you can only fly on trim when the weather is calm.

Hence we found a liquidity trap and none of the inflationary forces being set loose by central banks were able to make it out into the real world to combat deflation.

So central banks had to change strategy. How do you create a bucketload of money and get it out into the real economy fast? Well, how else? By encouraging the govt to launch mega-stimulus packages and issue Bonds like never before, to be bought by central banks using freshly created money. Simple!

To say that yields should be at 10% is wrong in my opinion. If central banks stopped injecting cash into the economy through Treasury purchases then the force of deflation would grow out of control and yields would fall towards zero.

Jul 14 10:47 AM

[Westcoaster:]

I agree with Medio.

Also, can very many of you find safe investments yeilding 10% out there right now. The market place also rules the yeild curve. If an investor can't make any money in the marketplace they like to sit on safe boring cash and wait. Therefore you are going to get really low rates. Cash creation has helped this situation also. Yields will continue to drop until banks are allowed to lend again and more confidence has returned.

Jul 14 12:35 PM