Sunday, January 2, 2011

The long-term view of Treasury yields

Just for the sake of putting things in perspective, here is a look at the last 85 years of 10-yr Treasury yields. The green line marks the 2010 closing level: 3.3%. It took a depression and massive deflation to drive yields lower, back in the 30s and 40s. I continue to believe that the relatively low level of Treasury yields today is an excellent indicator that the financial market is terribly worried about the ability of the U.S. economy to grow and prosper. That leaves plenty of upside potential for the optimists, of which I am one.


Andy said...

Scott - your blog has been a delight and something I look forward to reading every day. You have a thoughtful, rational, balanced approach. I wish you all the best for a Happy, Healthy 2011

Benjamin Cole said...

A fascinating epoch we are in.

I will be a contrarian here, and say we may see even lower rates yet.

The world is awash in capital, and now that we have a recovery, that supply of capital may even increase.

Zero bound? Yes, but all over the globe, people have to save for retirement, to buy houses, college etc. You have some cultures where saving is still regarded as a virtue (in America, hard to believe, I know).

Capital is not scarce. It is a fundamental shift from a generation or two ago.

Hopefully, we can avoid the Japan syndrome. We have population growth, and our Fed is not following ion the footsteps of the Bank of Japan. Indeed, both Milton Friedman and Bernanke advised Japan to go heavy on QE. They did not listen, save for a brief period from 2001-5, when their economy actually grew. The BoJ went back to pettifogging about price stability, and ended their QE. They have been nowhere ever since.

In the last 20 years, the BoJ has overseen a 15 percent expansion in the Japan economy. We have had a 150 percent increase, and we are growing again. They are not.

With Bernanke in there, I have confidence for next year, although I wish he was more aggressive and charismatic. I worry that Ron Paul, a certified fruitcake when it come to the Fed, will make problems for Bernanke. said...

Interest rates aren't going anywhere soon.

Charles said...

Housing, financial services, medical care, energy, the internet, labor relations - there has been a vast expansion of government into all these aspects of the economy. The whole country now revolves around DC. Until investors know whether this expansion of government power is permanent and until the shape of the newly government dominated economic sectors is clear, there will be a reluctance to invest.

At the same time there is the demographics of the people who are in a position to accumulate assets for retirement. There is an increasing appetite for low risk assets. Net worth is down from 2006 and a long way down from where people expected net worth to be in 2011.

Innovation is down, risk taking is down, consumption is down. What is there to drive the economy forward?

The economy will continue to creep forward, healing slowly, over the next year. Interest rates and inflation will creep up. Equities will benefit from the slow recovery in capacity utilization.