The Fed has the powers to alter short term rates. Long term rates such as those of the 10 year treasuries, are set by the market. Therefore, these rates are believable since they are not manipulated by the Fed or politicians.
Japan has been in a deflationary environment now for over a decade. The Nikkei Index peaked at nearly 39000 in Dec. 1989. The Japanese have been creating liquidity by lowering interest rates. Their 10 year bond yielded 8.43% at approximately the time Nikkei peaked. These days the Japanese 10 year bond yields a paltry 1% approximately. So much for the liquidity intervention by the Bank of Japan; today the Nikkei stands at around 9000 with deflation showing no sign of easing its grip.
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Let's look at the US since the stock market peaked in 2000. 10 year bonds yielded 6.67% and the Dow Jones Index (DJI) stood at around 11,700. Today the 10 year bond yields 2.62% and the DJI is at 10,447.
The Fed has indicated it will be buying bonds in its effort to create inflation. But so far the 10 year bond trend seems to be following that of Japan. If the 10 year Japanese bonds could fall to 1%, what is stopping the US from following the Japanese model? The bull market in the US bond market may not be over.
So what should one do in this environment? The safe portion of the portfolio still belongs in CDs. Those who set up a ladder in the last few years, congratulations. Your longer term FDIC CDs, those ranging between 5 years and 10 years have been yielding upwards of 5%, yields impossible to get today. That safe money belongs in the longest duration of the ladder.
In case the bull market in bonds is over and there is inflation and/or a dollar crises, continue dollar cost averaging a portion of your assets in precious metals. Those who made this choice in the last few years, as described in this article, should be doing ok. So really no need for any new fancy ideas here.
Disclosure: Positions in 5 year and 10 year CDs and precious metals
