It seems that the long-awaited crack in US Treasuries is opening up before our eyes. For some time now (actually for the last 8 months) we have been bemused as to who would “logically” or “rationally” lend the US Government funds for 30 years and be compensated by less than 4.5% p.a! At that return, it simply says that the actions the US Treasury and Fed have undertaken over the last 2 years will have absolutely no impact on inflation!
Not since World War II has the gap between expenditure (over 44% of the total federal expenditure in 2009) been this wide. And never in modern history has money printing been undertaken to the degree it has over the last 12 months. Of course the big mystery is who exactly will buy the new US government bonds to be issued over the coming months. Anyway that is perhaps a side issue, someone will be a willing buyer, but we think not at current yields.
We believe that inflation is likely to surprise on the upside (and dramatically so) over the coming months. Already commodity markets are moving higher in an almost linear fashion, and so too are the inflation premiums being attached to inflation protected Treasuries. The final nail in the coffin for the US Treasury market will be a multi-week high in yields on the US 30 year (a close above 4.75%). Perhaps yields on the US 30yr above 5% in a few months from now is a foregone conclusion
Continuous Commodity Index (Old CRB)
US 10yr Breakeven
US 30yr Yield
Why is it that we get this deep down feeling that the primary bull trend in US Treasuries since the 1990s is in the process of being broken, and that over the next 5 years, perhaps even 10 years, US treasuries are going to be locked into a bear market? Sometimes it is hard to translate feelings into words!