Friday, December 5, 2014

3-Month Treasury Yield "Fair" Value: 0.17%

In my last post, I came up with a 10-year treasury yield "fair" value of 2.15%. I thought I'd apply the same reasoning to the 3-month treasury.

The following chart shows the 522-week (~10 years) moving average of the 3-month treasury yield.

Click to enlarge.

Before going any further, please note the Fed induced panic in response to inflation and the Fed induced panic in response to deflation. Perhaps they should have simply left things alone rather than stomp on the brakes and then stomp on the accelerator. It does not inspire confidence. That said, all that stomping did allow Bernanke to be Time Magazine's Person of the Year in 2009 though, so that's something I guess.

Here's a bonus thought. Perhaps the markets overall are actually smarter than a small group of relatively detached central bankers behind closed doors? I know, it's just a crazy theory (if you are a relatively detached central banker behind closed doors, that is).

Okay, now on to the analysis. Since the trend in the 10-year moving average is falling linearly, one need simply look 5 years ahead to find out what the "fair" value of the current 3-month treasury yield could be. The result is 0.17%. This compares favorably to today's actual yield of 0.02%. All things considered, it's pretty darned close.

Here's where it gets really interesting/horrifying though. Since the yield has been falling 0.24% per year (2.4% per decade), the "fair" value will be below 0% within the next year. Won't that be a hoot. The actual yield clearly cannot go below 0%. If the economy truly does require interest rates to continually fall (as I strongly suspect that it does), then I would warn that things could easily start breaking somewhere (much like the cracks in a dam tend to cause damage as they grow). That's an "if" of course. I don't think anyone can know for sure.

Further, the Fed actually intends to raise interest rates in the middle of 2015. I'll be very curious to see how that all works out for them, and when I say curious, I really mean that I will have the clown horn standing by. Perhaps I should test it out one more time just to be safe.

I remain a permabear. I believe that any break from ZIRP will only be temporary at best. That's an opinion. Well, an opinion and a chart. Okay, it's an opinion, a chart, and a clown horn. And some sarcasm. That's it though.

In all seriousness, I truly hope I'm wrong to think that our economy cannot tolerate higher interest rates. It only seems to thrive on exponential/parabolic credit expansion and falling interest rates from what I see. The interest rate part of this ride is just about over. We seem destined to hit the floor just like Japan did and get stuck there. That's why I have been so willing to lock in long-term interest rates any time I could. In fact, I'd do so right now if I had more money to deploy.

Many bulls say we're not Japan. Well, duh. We're America. I think everyone can agree on that. People in Japan generally speak Japanese. We generally speak English. I'm not sure that's a great debate tactic though. When it comes to interest rates, we've been stuck in ZIRP for a long, long time. We've been told repeatedly that we won't be forever. That's definitely one way we're like Japan, and perhaps that's the only way that really matters.

This is not investment advice. Once again, I'm just a random blogger on the Internet who is very concerned about our economic future. If you want risk taking advice, I'm definitely not the one to ask. I'm retired. There's no way I'm swinging for the fences. Laugh if you want, but I think it is different this time.

Source Data:
St. Louis Fed: 3-Month Treasury Bill: Secondary Market Rate


Rob Dawg said...

"The actual yield clearly cannot go below 0%. "

Ummmm.... yes it can. Negative yields just means a market purchase at a price above par plus yield to maturity. It happens.

Stagflationary Mark said...

Rob Dawg,

Yeah, it can, but not by much.

Nobody is going to by a -10% 3-month treasury bill when cash yields 0%.

Stagflationary Mark said...


"by" = "buy"