Treasury Yields Aren’t Indicating Much

You can view the latest U.S. Treasury yields here.  For the month of October, the one-month and three-month yields have been at zero on most days.  A few days they were at .01%.

It is hard to say why anyone would buy short-term treasuries at zero percent.  Then again, there were negative yields at one point in Germany and Switzerland, even on longer-term debt.

It was a little more understandable in Europe, especially during the crisis in Greece.  (The crisis isn’t over yet, but it has temporarily settled down.)  If I lived in Greece and had the options of putting my money in a Greek bank or putting my money in a German bond that yielded (if that is the right word) a negative interest rate, I would go with the German bond.

The fact that U.S. Treasuries are at or near zero shows that our economy is in a continual state of fear.  The stock market is not an indicator of what is happening in the general economy.  If it crashes quickly, it may give us a sign of what is to come for the economy.  But the gains over the last 6 years have not been commensurate with prosperity for the middle class.

The 30-year yield is currently just under 3%.  The 10-year yield is just over 2%.  It has been in a relatively narrow range lately.

The inverted yield curve – where short-term rates are higher than long-term rates – has been a good past indicator of a coming recession.  In many ways, this no longer works.  The long rates would have to fall to near zero, unless the short rates went up significantly.  I don’t see that happening.  I think the best we can hope to see as far as a warning sign is just a somewhat flattening yield curve.

The Fed pumped in over $3 trillion over a period of about 6 years (2008-2014).  Much of this money went into excess reserves held by banks.  This has helped keep price inflation down because it is not being multiplied by fractional reserve lending.

It is obvious that most investors have little fear of price inflation right now.  The gold price has been trading in a relatively narrow range.  And when the 30-year yield is less than 3%, it tells you that bond investors have little fear of inflation.

The fact that QE3 – the Fed’s latest round of money creation – ended almost a year ago, indicates that the long-term rates are not being manipulated by the Fed to any great degree right now.  Investors have little fear of inflation and virtually no fear of default.  On the last point, they are probably correct, but you never know what could happen 30 years from now.

We also have to consider that foreign investors (which could include foreign central banks) have an impact on U.S. yields.  Perhaps foreign investors are seeking more safety, which would include an investment denominated in dollars.

Unless you need liquid money in a specific period in the future, I don’t see the point of investing in short-term U.S. government debt.  If you know you are going to be buying a house in just over a year and you have a down payment already saved, I can understand buying a one-year cd or something similar.

I can also appreciate buying long-term bonds.  I advocate a permanent portfolio as described by Harry Browne in his book Fail-Safe Investing.  Long-term bonds aren’t an attractive investment right now, but they do give you some diversification, especially as protection against a bad recession or depression with falling rates.

The bottom line is that the economy never really recovered.  The Fed has attempted to cover up the problems by artificially boosting the economy, but even this has been modest in terms of growth.  Meanwhile, the Fed has built up massive malinvestment with its money creation.  It just has not resulted in massive price inflation because of the continued fear.

The American middle class is right to be afraid.  They know – or at least sense – that their incomes are not keeping up with the basic costs of living.  Health insurance has been the biggest killer, but even food and housing have been tough.

A recession is already baked into the cake based on the Fed’s previous actions.  It is just a matter of when and how big.  For the American middle class, they will actually be better off in the long-term if the recession happens sooner rather than later.

A recession will be tough no matter what, particularly with unemployment, as resources reallocate to fit actual consumer demand.  Americans need a recession to clear out the misallocated resources and to bring prices more in line with their incomes.

In a true free market, near-zero interest rates would be indicating that savings are really high.  Unfortunately, this is not the case because the Fed has greatly distorted the marketplace, including the marketplace of interest rates.  We are still going to pay dearly for the Fed’s actions since late 2008.  It is just a matter of when.

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