Click to enlarge.
In blue (left scale), we have the 5-year treasury yield minus the 5-year CD rate. I claim that the current spread is as irrational now as it was in 2007. This can be forgiven perhaps since the typical investor is never told to buy a 5-year treasury directly from the government. Wall Street cannot earn a penny on purchases made outside of their control.
In red (right scale), we have the S&P 500 index adjusted for inflation. I claim that the current inflation adjusted index is as irrational now as it was in 2000 and 2007. This can be forgiven perhaps since the typical investor is never told to buy a 5-year treasury directly from the government. Wall Street cannot earn a penny on purchases made outside of their control.
It is by no means an irrational fancy that, in a future existence, we shall look upon what we think our present existence, as a dream. - Edgar Allan Poe
This is not investment advice. Just opinions!
Source Data:
St. Louis Fed: Custom Chart
10YT at 2.98%
ReplyDeleteTJandTheBear,
ReplyDelete10YT at 2.98%
2.99% is the official daily rate.
Here we go again!
10-year Treasury Yield Minus Fed Funds Rate
There's some bonus spread not seen in the chart since the data is only good through December 20th (10-year was 2.89% on that day).
We'll just have to see how strong and robust the economy is in 2014 and beyond (especially if yields really do rise). So many seem to think that we've entered a new permanently sustainable growth era. I doubt either of us believe that's true.
June 19, 2013
Market Consensus: Get Ready for 3% Treasury Yields
"Yields are far from their 'normal' levels, or yields that we would have expected in the absence of quantitative easing by the Federal Reserve," strategists from Societe Generale said in a research note on Tuesday. Societe Generale forecasts 10-year U.S. Treasury bond yields will hit 3 percent by Spring next year, and rise to 5 percent by 2017.
Far from their normal levels? Hahaha! They've been decaying since 1980 and with great consistency (as we've taken on more and more debt). Define normal! We're right in the middle of the decaying trend channel. How much more "normal" could they be?
5 percent? I'll definitely take the under on that one. I trust the opinions of Societe Generale about as far as I can throw them.
December 4, 2013
SocGen Blames Single Trader After $607 Million Rate-Rigging Fine
Dec. 4 (Bloomberg) -- Societe Generale SA, France’s second- biggest bank, placed sole blame on an ex-trader it didn’t identify for interest-rate rigging that cost it 446 million euros ($607 million) in European antitrust fines.
Yeah, one guy did that. Uh huh. And I am Galadriel! In the place of a Dark Lord you would have a Queen! Not dark but beautiful and terrible as the Morn! Treacherous as the Seas! Stronger than the foundations of the Earth! All shall love me and despair! ;)
We have to start calling this the trust spread. If we could trust the government and the Fed we would be seeing sub 2% just like the Germans.
ReplyDeleteMerry Christmas!
ReplyDeleteStocks seem bubbly, rates are rising, GDP is on fire. These things are happening partly because it is Fed policy to push up asset prices. Until that changes, it could go on for a long time.
ReplyDeleteI have no interest in stocks at these prices, but crazy prices for everything may be the future. Do markets really exist when they are overpowered by a trillion a year in fresh-from-the-void currency? Not in those things that are targeted by that trillion.
We have markets in labor, especially unskilled labor, and commodities (not counting farm subsidies). I don't think we have markets in financial assets. We have managed targets.
Rob Dawg,
ReplyDeleteWe have to start calling this the trust spread.
In Gawd we trust spread. ;)
GYSC,
ReplyDeleteLong time no see! I know you've been busy (still read your blog).
Merry Christmas to you as well!
Mr Slippery,
ReplyDeleteI have no interest in stocks at these prices...
Thanks to ZIRP, I have no short-term interest in anything Wall Street's selling. Pun intended!
It's Christmas. The link is my gift to you. It's not a chart but it makes me laugh. Can't ever have too much of it!
As a side note, interest rates tend to be higher late in a business cycle as investors once again start to believe that stock prices can only go up and bond investors are cowardly fools.
I'm more interested in what interest rates will be after the next recession though. The real fools are those who believe that Ben "There Is No Housing Bubble to Go Bust" Bernanke has permanently put a stop to recessions and that our weakened economy has therefore become permanently resilient.
That's just an opinion of course.
Love the clown horn. Thanks!
ReplyDelete...the typical investor is never told to buy a 5-year treasury directly from the government.
ReplyDeleteWhat are we doing to decrease the number of "typical investor"'s?
Not decreasing the number of "typical investor"'s is akin to increasing the number of voters who believe we can vote ourselves out of the mess this COuNtry is in.
Wrong direction.
Fritz_O,
ReplyDeleteWhat are we doing to decrease the number of "typical investor"'s?
Movin' 'em to the food stamp program.
Ba dum tssshhh
Shame on me. Gallows humor. Sigh.