Sunday, October 21, 2007

The Death of Real Yields

If the economy is so strong and healthy then why haven't higher real yields returned? The 10 Year TIPS were yielding in excess of 3.5% before the dotcom bubble burst (not shown in the chart due to lack of data).

Greenspan's Mysterious Conundrum (2005)
That the Fed says it is puzzled by this phenonema means of course that they are trying to absolve themselves from any guilt for the low yields and the problems they create. But as we shall see, the Fed is guilty just as it was guilty of fueling "the irrational exuberance" of the tech stock bubble.

Here's a thought. Real yields were actually negative in the 1970s as the price of oil and gold rose. Some conundrum, huh?

For many investors the high level of debt in U.S. households makes it unlikely that the Fed would dare increase interest rates even more. Similarly, the sluggish growth and/or high debt burden in other rich countries have also increased expectations of continued low short-term interest rates there.

Of course, to the extent that low bond yields are a result of expectations of money supply increases rather than actual increases it will not cause a lowering of the overall cost of capital, but will mean a shift in investments from stocks and by extension business investments to fixed-income securities and by extension housing construction.

In conclusion, the explanation of the low yield on U.S. government securities is neither expectations of low inflation or falling global time preferences ("global savings glut"), but money-pumping by the Fed and other central banks and speculation in continued high levels of money-pumping.

I am in complete agreement.

Source Data:
FRB: Selected Interest Rates
Treasury Direct: I Savings Bonds Rates & Terms


Anonymous said...

Absolutely. So when "leaders" like Billy Poole say things like the following, what is one to think? (from Reuters) - Federal Reserve Bank of St. Louis President William Poole said on Friday that interest rates are about right and if the Fed decides to cut again, it ought be confident it will not have to quickly reverse course.

"If I thought that we were way off the right place, what evidence would I offer? Well, I think the market would be looking at the same thing that I'm looking at, and then we wouldn't be there, we'd be in a different place," he said.

Great job Billy, you get an A+ in circular reasoning. And this guy is one of our financial "leaders"? No wonder we're in such deep sh*t.

Stagflationary Mark said...


I believe I have found a musical tribute to do your comments justice.