LONG TREASURY BOND YIELDS
The current low level of long term interest rates is creating all types of debate about what it is suppose to signify and what investors are discounting.
Maybe they are not signaling anything and it is just a return to normal for interest rates. For example, from 1871 to 1960 long Treasuries were below 4% some 75%of the time. Over the long sweep of history very low rates were more the norm than the high rates of recent decades. Maybe the recent history was the exception and we are now just returning to a more normal level of rates.
P.S. I came back later and replaced the first chart back to 1921 with one back to 1871.
Uh, Spencer, until 1967 it was Federal law that the coupon on a bond couldn’t go above 4.25%. Don’t the historic bond market with the free market, the way he “there is an always will be an equity premium” people do.
This is the first time I’ve ever heard of the law.
I remember my first boss in the investment business talking about when yields went above 5% IN 1965.
It was a big deal for him.
Moreover,the data shows yields rising above 4.25% in 1965. This means the Treasury was breaking the law from 1965 to 1967 if this data collected by the Federal Reserve is accurate.
karl smith points ot that with interest rates as low as they are now, we could eliminate all federal taxes today & borrow 30 years out, & make a profit on that borrowing if the country grows 1.1% annually or more over that 30 year stretch…
karl smith points ot that with interest rates as low as they are now, we could eliminate all federal taxes today & borrow 30 years out, & make a profit on that borrowing if the country grows 1.1% annually or more over that 30 year stretch…
Maybe the rates are discounting deflation?
Just guessing, but it seems feasable that demand for T-bills may have been artificially stimulated in recent decades. I’m not sure how much dollar hegemony applies to “long Treasuries”, but… the demand for T-bills in general has benefitted from some historical anomalies such as ‘petro-dollar’ recycling and of course the more recent recycling from Japan and China and etc..
There was also of course the IMF’s adherence to the ‘Washington Consensus’ ploys to encourage poor nations to hold T-bills as evidence of credit worthiness. Then too of course the USA has been staying ahead of the Triffin Dilema by maintaining a semi-permenant trade imbalance with the ROW. Presumably though, most of these “exorbitant privledges” are coming to an end… assuming that there are limits to QE.
ray
While we all have lived in a time where Treasury rates defined interest rates but that was not always so and may not be so in the future.
Instead spend some time pondering what a rise in Treasury rates would mean now that outstanding Treasury securties are at a record high, and growing, at over 60% of GDP. Dwarfing any number of the past.
For anyone who follows or believes in cycles there is a fairly broad consensus that rates have a 30 year cycle.
This bear believes that eventually Treasuries will not be the benchmark and lowest rated security. Until that pappens nothing has changed and of course when it does everything will have changed.
While we all have lived in a time where Treasury rates defined interest rates but that was not always so and may not be so in the future.
Instead spend some time pondering what a rise in Treasury rates would mean now that outstanding Treasury securties are at a record high, and growing, at around 70% of GDP. Dwarfing any number of the past.
For anyone who follows or believes in cycles there is a fairly broad consensus that rates have a 30 year cycle.
This bear believes that eventually Treasuries will not be the benchmark and lowest rated security. Until that happens nothing has changed and of course when it does everything will have changed.
While we all have lived in a time where Treasury rates defined interest rates but that was not always so and may not be so in the future.
Instead spend some time pondering what a rise in Treasury rates would mean now that outstanding Treasury securties are at a record high, and growing, at around 70% of GDP. Dwarfing any number of the past.
For anyone who follows or believes in cycles there is a fairly broad consensus that rates have a 30 year cycle.
This bear believes that eventually Treasuries will not be the benchmark and lowest rated security. Until that happens nothing has changed and of course when it does everything will have changed.
Cupon rate and actual yield are two different things. If law or policy it makes do difference. The price adjusts accordingly to produce a yield at a ‘market’ rate, even at auction.
Old Testament had usury as a severe sin.
I am betting equity deflation.
Keeping my coffee cans filled.
A good next step in the analysis would be to look at real bond yields to see if they have also returned to that pre-1960 nirvana. To a great degree, we may be looking at a chart of inflation expectations.
It is also worth thinking about the fundamental environment, including risks of various kinds, to decide where to look next in answering your question. My first urge is to say that risk perceptions in the US in the pre-1960 period, while different in nature, were probably quite elevated. Recession was more common and more severe in the pre-1960 period (till 2008, that is). The US went through wars that presented real threats, if not to our existence as a country, then at least to very important overseas interests. We now, once again, see a broad set of risks in the wider world, to domestic economic performancer, to other financial investments…
The politician’s instinct is apparently to think that risk should mean higher Treasury borrowing costs. History says otherwise, and politicians (along with the WSJ editorial page) keep getting it wrong. So once we look at real yields, I’m guessing we’ll see they vary inversely with perception of risk of various types, just like a bond trader – not a politician – would expect.
Sidney Homer (RIP) also seems to have been unaware of any law restricting Treasury yields to below 4.25%.