Many experts have declared a bubble in long-term US Treasuries. Interestingly, however, several of the reasons given by experts for why yields will ultimately rise do not pass the test of history. Foremost among the reasons that many point to is the daunting outlook for US government debt levels. Normalized for GDP, US Total Debt stood at 83% of GDP in Sept. '09, a post WWII peak. It is projected, according to the Obama 2011 budget, to reach 94% by Sept. '10 and continuing increasing over the entire 10-year horizon of the budget. While it would seem that higher debt levels would correspond to higher interest rates on government debt, history does not bear this out. In fact, as seen in the chart below, over the course of the last 60 years the yield on the 10-year Treasury has moved roughly inverse to the level of Total US government debt to GDP. While this does not mean that the relationship will continue to hold, it does take some air out of the argument that rates must climb in the near-term.
Another argument is that the Fed will need to start raising rates at some point in future. When that happens, the argument goes, longer-term rates will move up as well. The chart below compares historical Fed Funds yields with 10-year Treasury yields. While the two generally do move together on average, it is also the case that the spread between the two is near historic highs. Even if the Fed began raising rates tomorrow, it could be a long time before Fed Funds rates got high enough to force a move in the 10-year.
Some experts talk about the pending bout of inflation as a driver for higher rates. But, as shown below, core consumer price inflation touched a 44-year low last month. They may begin pulling rates further down with them if the trend continues.
More recently, as shown in the chart below, Treasury yields have begun to move in tandem with the stock market over the last decade. While many will say this is intuitive, looking at the second chart below, this was not the case for the 20 years leading up to 2000.
If the thing that ends up driving rates higher is a strong stock market, we will all be happy.
Disclosure: No positions