If equities have priced in a long, deep recession, the bond market seems to be expecting an outright depression. Despite the promise of trillion-dollar Federal budget deficits and debt monetization (i.e. “quantitative easing”) by the Fed, the 10-year Treasury is 2.75%, the lowest level in half a century.
Five-year inflation protected Treasuries (TIPs) are yielding more than nominal five-year Treasuries, suggesting that Treasury investors expect negative CPI inflation over the next five years!
Fears of default and lack of market liquidity have pushed spreads on municipal and corporate bonds to levels not seen since the Great Depression. AAA rated 30-year municipal bonds are yielding 5.47% at present, which works out to a taxable equivalent yield of 7.6% for a taxable investor in a 28% tax bracket. This is 240% of the current 3.14% yield on 30-year Treasury bonds. Junk bond yields and spreads to Treasuries have never been as high as they are today. It appears that the only remaining bubble in the markets is in Treasuries.
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