Friday, January 13, 2012

5 Year Treasury Yields

Click to enlarge.

The black line represents 5 year nominal treasury yields adjusted for the inflation over the following 5 years. Note that the line stops 5 years ago. We do not yet know what the real yield of a 5 year nominal bond bought recently is. It depends on what inflation does before the bond matures.

The blue line represents 5 year TIPS yields. They have the inflation adjustment built in so we do know what the real yield will be at the time of purchase.

If the 1965 to 1980 time period is any indicator, real yields can stay low for a very long time. All it would take is a weak economy (an economy where money cannot be easily be made off of money).

For what it is worth, I am firmly in the weak economy over the long-term camp.
Unlike some supposed experts, I believe that a 1980s and/or 1990s economy will *never* miraculously reappear. As seen in the following chart, there are too many headwinds. Those drawing on historical data to predict the future seem to ignore what the chart is clearly saying.

This time is different.

Click to enlarge.

Source Data:
St. Louis Fed: 5-Year Treasury
St. Louis Fed: 5-Year TIPS
St. Louis Fed: CPI


Stagflationary Mark said...

Be sure to read the "unlike some supposed experts" link. Jeremy Siegel is in top form. Based on his commentary, pension funds should expect even better returns going forward.

Forehead. Desk. Whack. Whack. Whack.

dearieme said...

It seems to me that Reagan in some respects ran a wartime economy, in hopes of winning the Cold War. And so it proved. But then his successors should have unwound that debt-based, deficit-based economy, as the governments of the 1950s did. But they didn't: with Mr Greenspan's assistance, Congress and the Presidency ran bubble after bubble until the uber-pop.

TJandTheBear said...

Never is right. Check out OfTwoMinds for a good piece on contraction.

Troy said...

One thing about the 1962-1977 period was that we could actually afford higher interest rates on our debt.

These days we don't have the luxury of being able to service our debt at higher interest rates.

"I have no solution, but I certainly admire the problem"

Stagflationary Mark said...



Stagflationary Mark said...

tj and the bear,

From your link...

Habituating to Contraction

Humans habituate quickly to a wide range of conditions and expectations, but once they've settled into the new habitat, they are resistant to new conditions. Needless to say, humans prefer a future in which there will be more of everything over one with less of everything, as permanent expansion means there will be few if any troublesome cost-benefit analyses, hard choices or painful triage, and little need to adjust to new realities.

That pretty much sums it up, doesn't it?

Stagflationary Mark said...


"I have no solution, but I certainly admire the problem"

Great quote.

From a mathematical perspective, I respect exponential trend problems with no solutions (such as coming up with 39.5 million jobs to keep the long-term trend employment trend alive when there are "only" 13 million unemployed).

Troy said...

"jobs" are over-rated.

I say that only half in jest.

Productivity is up 2.5X since 1950:

Why aren't workweeks down to two days a week?

Well, that's a dumb idea but the point remains : )

fried said...

i know this is off the subject, but I was interested to see the limits on 1bonds for 2012 have been changed...

* $10,000 in Series EE Bonds, and
* $10,000 in I Series Bonds.

For paper Series I Savings Bonds, purchased with your IRS tax refund, the purchase limit is:

* $5,000 in paper Series I Savings Bonds

Pasted from Treasurydirect.

Stagflationary Mark said...


Why aren't workweeks down to two days a week?

Just lucky I guess!

Stagflationary Mark said...


Thanks for posting that!

Purchase Limits

$10,000 in Series EE Bonds, and
$10,000 in I Series Bonds.

I assumed that I could not buy more than $5,000 of each once they removed the ability to buy paper bonds at financial institutions.

You did me a great favor. I was about to participate in the 10-year TIPS auction this week by making a small purchase. I shall instead go the extra savings bond route.

Scott said...

Completely agree. The inflationary period that was ended by Volcker was the result of Kennedy/Johnson administration running Great Society, Vietnam War, and Apollo projects all at the same time. With very low immigration during that time period, the only factor working against wage inflation was the widespread entrance of women into the workforce.

Stagflationary Mark said...


There are many factors working against American wage inflation this time. It would seem that the powers that be prefer it that way too.

Heck, for that matter one wonders just how much stamina Chinese wage inflation will have in a brave new robotic world.