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Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected. - George Soros
The following chart shows the inverse of the 10-year treasury yield. For example, a 5% yield would be a 20 on the chart (1 / 0.05 = 20).
Click to enlarge.
The downward trend in treasury yields has been predicted to fail for many years. As seen in the chart, the only thing that's truly failed so far is its exact opposite (its inverse) though. Further, when most trends fail they tend to fail in the opposite direction as the original trend. That was not the case here. For example, did the long-term upward exponential trend in job creation fail to the upside? I think not.
We're now simply back in the long-term channel. It's hard to read much into that. I wouldn't be willing to use the word "obvious" until we pass through 30 to the downside on this chart (and stay there for a full semi-annual period). Then we'll talk about the trend in falling yields being over. Until that point, I just don't see the "obviousness" of it that many seem to see.
1 / 30 = 3.33%
Now that's a target yield worthy of consideration. Based on the stock market's strength recently, I'm kind of surprised we aren't even closer to it than we are. On a relative basis (considering the long-term trend in the chart above), yields were very high heading into the last recession. Perhaps we're just not there yet, or perhaps many investors like myself are starting to really believe in the death of real yields story. You know, burn me once (dotcom bubble) shame on you. Burn me twice (housing bubble), shame on me. The saying just sort of stops there though. For what it is worth, I personally don't want to risk what happens after the third burning, lol. Sigh.
So why am I charting the inverse here? I have a fairly good reason actually.
I think many are failing to realize that the difference between a 0.2% yield and a 0.1% yield can be the same as the difference between a 20% yield and a 10% yield, especially in regards to an over-leveraged society.
Here's an example.
If I borrow $10,000 @ 10%, then I have to make $1,000 annual interest payments.
If I borrow half as much @ 20%, then I still have to make $1,000 annual interest payments.
If I borrow $1,000,000 @ 0.1%, then I have to make $1,000 annual interest payments.
If I borrow half as much @ 0.2%, then I still have to make $1,000 annual interest payments.
When seen in this context, the difference between 1% interest rates and 0% interest rates is infinite (0.01 / 0.00 = infinity), which is clearly not at all the trivial amount most would suggest. We could therefore continue to approach 0% without ever really reaching it.
Put another way, 0% is like a singularity. We may have already entered its event horizon. At 0%, the forces of leverage can become infinite. Just as in Japan, there may be no easy exit from such ultimate goal madness.
NASA: Event Horizon and Time
If you (in a space ship, for example) were to approach the event horizon and cross it, to a person watching you from a great distance it would look like you moved slower and slower as you got closer and closer to the horizon. To them it would look like you never quite reached the horizon. But this is an illusion caused by the fact that the light you emit from your space ship is taking longer and longer to reach the outside observer. This is due to the black hole's immense gravity. From your own point of view, you reach the horizon and cross it, with nothing special happening at the boundary. But of course, the gravitational forces of the black hole will crush you do death sooner or later!
Isn't that exactly what people have been saying about Japan since their housing bubble popped in the early 1990s? They've certainly been moving slower and slower to outside observers. Like most, I would also argue that their debt may crush them at some point. I'm only questioning the timing of when it may happen to us. If Japan is any indicator, sooner or later could be a very, very long time.
And now for the moral of the story.
In any event horizon, there's always a bull market in black holes. If indeed we've got another one, then try not to get sucked in like the Japanese did (Nikkei 225 Index Adjusted for Japanese CPI)! There are worse things in life than being slowly crushed to death by supposedly rising treasury yields, especially if held to maturity.
This is not investment advice. As usual, just opinions.
Source Data:
St. Louis Fed: Custom Chart
U.S. Treasury: Daily Yield Curve
