Monday, August 16, 2010
The 10-yr Treasury yield has fallen to a new post-2008 recession low of 2.58%. Yields have been lower, but only by a bit, and only in the late 1930s and 40s, which were times of profound concern about the future of economic growth. I take this as prima facie evidence that market is priced for some very, very bad news. Pessimism can hardly get much deeper than it is today. I reproduce the history of the CPI over this same period below:
Note that the late 30s and most of the 40s were times of very high and volatile inflation, yet 10-yr Treasury yields were a mere 2-2.5%. If this is not a great example of how low bond yields are not a reliable indicator of impending deflation, I don't what is. Indeed, if history is a guide, very low bond yields such as we have today have more reliably been a sign of very high inflation (note how bond yields were relatively low in 1975, when inflation spiked to double-digits.
As with my post yesterday, I am not claiming that low yields are proof-positive that inflation is set to rise. Rather, I think it's important to note that the history of very low bond yields offers little or no comfort to those who are betting that deflation is more likely than reflation going forward.
Posted by Scott Grannis at 1:19 PM