Friday, October 10, 2014

Is the 1 Year Treasury Yield Too High? (Musical Tribute)

With the 1 year treasury yield at a miserly 0.1%, it seems like a silly question. Or is it?

The following chart shows the 1 year treasury yield minus the annual growth in the average hourly earnings of production and nonsupervisory employees. I have added a linear trend in red (and a ±2% trend channel to go with it).

Click to enlarge.

We're currently in the top half of the channel, and in a grand scheme of continually falling interest rates to boost a decaying overleveraged economy sense, that may mean that monetary policy is actually tight right now (like it was in 2000 and 2007 as seen in the chart).

It will be interesting to see what happens when this long-term trend can no longer continue. And when I say interesting, I really mean horrifying.

In all seriousness, one of my worst economic nightmares is and has been that we would slide into a recession while already stuck in ZIRP. The bulls seem to think it is impossible. Good luck on that theory. Many things are impossible. I'm pretty sure that this isn't one of them though (see Japan). Sigh.

Source Data:
St. Louis Fed: Custom Chart


dearieme said...

Back in April I ignored all the crystal-ballers and took a punt on fixed interest Gilts. They have gone up very nicely. Do I get my contrarian's badge?

Stagflationary Mark said...


You qualify for the BBBBBB (Ben Bernanke Bond Bubble Buster Badge)! Very prestigious! Congrats! ;)

Jazzbumpa said...

That's an impressively clean trend channel.

I'm trying to wrap my head around the significance of the 1 year treasury yield minus the annual growth in the average hourly earnings of production and nonsupervisory employees.

But I'm not getting it.

At all.

Care to elaborate?


Stagflationary Mark said...


This is what the chart could mean to me, for what it is worth.

What if the nominal wage growth we've seen over the past 3 decades is indirectly dependent on falling short-term interest rates (as possibly seen in the downwardly sloping trend channel) and we're now at our limit?

I think most people would agree that if the Fed dramatically raised interest rates then hourly earnings growth would suffer. Picture what would happen if the Fed Funds rate went to 10% next week. Think of the employment carnage.

But, what if it doesn't take rising rates? What if long-term stability can and has been maintained indirectly by constantly falling short-term interest rates and the rates cannot fall further? Then what?

Specifically, what might happen to hourly earnings growth? If it falls over the long-term because the Fed can no longer lower short-term interest rates over the long-term, then things go to hell in a handbasket. The Fed's natural reaction would be to lower interest rates (when they can't). Oh oh, deflationary spiral.

Stagflationary Mark said...

Put another way, if you believe as I do that much of the "prosperity" of the 1980s and 1990s was fueled by credit expansion and constantly falling interest rates, and you also believe that hourly earnings growth of workers is part of that "prosperity", then you may be as worried as I am about what might happen to future "prosperity" if we enter the next recession while still stuck in ZIRP. :(

Troy said...

There's also a demographic dimension to consider here. . .

annual inductees into working-age population; from here on out the baby boom leavers and Gen Y arrivals are about in balance I think.

I think a lot of the inflation of the 1970s was a system under stress of the baby boom hitting their 20s and 30s. Everyone wanted to borrow on their clean slate, but the system couldn't do that instantly, without rip-roaring inflation at least.

Add in the regime change of women flooding into the workforce, and, man, growth city.

Stagflationary Mark said...


There's also a demographic dimension to consider here. . .

For the life of me, I can't decide how to factor it in long-term. Is population growth a blessing from here or a curse? I guess it comes down to the amount we can automate compared to our ability to think up new jobs. I'm not optimistic.

Computers are getting smarter faster than humans are getting smarter. That should be a great thing, but, well, you know.