Michael B. Krause

Long Term Treasury Yields Likely to Rise, Pressuring Dollar Lower

Everyone likes to be clever and say US treasury yields are going to the sky (and thus the US government is headed towards bankruptcy). Thus the massive interest in this piece.

Any article saying to buy treasury bonds right now is uninteresting, unjustified, and generally doesn't have much popular appeal.

Interesting.

T-Bills vs. Fed Funds: A Recessionary Tale

Also important to note: operating PEs are what are accepted as typical valuation models (not GAAP PEs) nowadays.

T-Bills vs. Fed Funds: A Recessionary Tale

www.econ.yale.edu/~shiller/data/ie_data... is another data source. I took mine from a bloomberg spreadsheet.

T-Bills vs. Fed Funds: A Recessionary Tale

Very fascinating work. The inflation relationships are certainly a key factor explaining why we are where we are, but of course inflation rates cycle as well. I will look deeper into this.

About drop in earnings to the first poster -- its fascinating to look at GAAP versus operating (higher) earnings. My #s are based off of operatiang measures. In actuality, GAAP earnings of 2000-2002 reflected at peak a 49% y/y drop on the S&P. Huge divergence from operating numbers. Just another wrench in the toolbox of analysis. The Shiller #s are GAAP based earnings, while S&P (service) provides both. Take a look www2.standardandpoors....

Why Treasuries Are the Way to Go in This Market

Leo: This is a search for appreciation trade, not a yield hunting one. Preferred stock purchases (or corporate bonds) have considerably higher downside in the event a recession occurs (as they take corporate risk). If recession happens (and inevitable increase of defaults associated with that), corporate debt credit spreads will rise and offset some of the gains in the underlying treasury position. (recall corporate debt = treasury of equiv duration + credit spread)

Furthermore, a yield curve inversion with a recession will enable the longer duration note and bond to fall past fed targets. So even if the fed stops at 3.5%, a flight to quality could enable the long yield to hit 2.5-3.2% just as easily.

Obviously its hard to imagine 2.5% 10 yr notes with the PPI and CPI #s we are seeing right now, but a global slowdown could turn this commodity based inflation move an opposing direction. Expect some volatility of PPI/CPI #s. I wouldn't be surprised to see negative CPI/PPI y/y (12 mos from now) if the consumer and world growth continue to slow. Then 2.5% yields are more palatable, aren't they?