On January 10th I thanked the stock market bulls for giving me what looked like a dead cat bounce in the 10-Year TIPS yield. Using hindsight, that thank you appears well founded. I was buyer in the TIPS auction that day. I got a pretty good yield, all things considered (see the spike in the chart below).
In sharp contrast, those hoping for higher real yields while parked in cash found no relief in today's action. The death of real yields momentum appears to be "well anchored" even during today's impressive stock market rally (money also flooded into my TIP bond fund at double normal volume). In theory, a 0% real yield is the lowest it can possibly go (since TIPS cannot yield less than 0% during an auction). Things would get really interesting at that point (and when I say interesting, I actually mean depressing).
I find it very hard to imagine anyone (other than me perhaps) would accept such a low real yield willingly. However, those who have studied the 1970s would see that real yields can turn negative on treasuries of all durations thanks to persistent and rising inflation. I can't say for sure that's what we'll be getting, but I see very little reason to rest assured we won't. Just look at the yields on the short-term treasuries. Those real yields appear to be negative. In my opinion, it is the logical conclusion of seeing way too much money (in the hands of the rich but certainly not of the poor) chase far too few investment ideas now that the you know what and the fan are meeting up.
I've been stagflationary (using falling real yields as my definition) since 2004 and I see very little reason to change my long-term mood. Apparently it is going to take more than a popping housing bubble and a credit crisis to offer disinflationary relief, thanks to Helicopter Ben making the rounds.
If I had but one prediction, it would be that it will grow increasingly difficult to make money off of money going forward. That's why I continue to track what I call the death of real yields. Does that mean I'm endorsing backing up the truck on gold and silver? Not really (although heaven help us if we all should be in gold and silver at these prices). They've had quite a run. Surely there must be something of better value these days, like toilet paper (which is still cheap if inflation truly is coming). I'm especially fond of I-Bonds. They are SO much better than TIPS these days. They have a 1.2% real yield that's tax deferred for up to 30 years. In fact, they are such a good deal in this environment that the government just dramatically reduced the maximum you can buy each year. Should that interest you, you have until the end of April to get that 1.2% real yield. It will then be reset (presumably lower based on what real yields have been doing).
Maybe I'm wrong. Maybe real yields will shoot higher as inflation picks up and Bernanke raises rates to counter it. That's always a possibility. It just doesn't seem like a very likely possibility these days. Emergency rate cut meetings combined with nearly desperate pleas for a stimulus package implies inflation is the last thing on his list of worries at the present time. It is also possible I'm wrong about future inflation. Maybe the USA will be flooded with even cheaper goods from overseas even as our dollar falls and billions strive for our standard of living. Forgive me for not holding my breath on that deflationary outcome.
This is not investment advice. It is just the opinion of a random anonymous bearish blogger on the Internet. Keep that in mind.
U.S. Treasury Real Yield Curve Rates
IMF Demands “Unconditional” Debt Relief for Greece (Mish Says “Prove It”) - Most political and financial demands are nothing but bluffs or lies. For example, on May 14, I noted Greece “Demands” … Continue reading →
2 hours ago