At the start of June 2022, the 10-year yield was 2.85%.  It proceeded to go as high as 3.49% on June 14, 2022.  But then it fell again and closed at 2.88% on July 1, 2022.

This is quite a bit of volatility.  It isn’t Bitcoin volatility.  But for something that is seen as about the safest investment on earth if you don’t count the inflationary effects, it is quite volatile.

The 10-year yield was well below 2% at the start of the year.  So it has gone up a lot since then, at least in percentage terms.  This is a main reason why mortgage rates have also gone up significantly.  Mortgage rates have a high correlation with the 10-year yield, even though most mortgages are for a longer time period than 10 years.

If you look at the 3-month yield, it started the year at 0.08%.  That’s almost zero.  It is now up to 1.73%.  Short-term rates have gone up by a greater degree than long-term rates.  The big picture is that the yield curve has flattened a bit.  We already see the 2-year yield close to the 10-year yield, and this has in fact already inverted at times this year.

With the government reporting consumer price inflation above 8%, the Fed has been raising its target rate for overnight bank lending.  This helps to drive rates higher, but especially short-term rates as we have seen.

It seems to be an almost unanimous consensus that yields are going higher, including longer-term yields.  I can hear that opinion from Austro-libertarians, and I can hear that from a conventional analyst on CNBC.

There are exceptions, of course.

While I am not predicting that long-term yields won’t go higher, I will point out that this certainly doesn’t have to be the case.  In fact, there are just as strong reasons to argue that long-term yields may fall again, at least in the short run.

I am not talking about what rates will look like 5 or 10 years from now.  But over the course of this year and into next year, I think there is a good case that long-term yields may fall back down.

If we get a hard recession, I fully expect this to happen.  The wildcard in this is price inflation.

If the price inflation keeps coming in high and the Fed keeps tightening and raising its target rate, then long-term yields probably won’t come down much in the near term.  We may end up in a stagflation situation similar to the 1970s when interest rates were in the double digits.

But I can’t discount that the Fed will be “successful” in bringing down the CPI number to somewhere around 3%.  While there are a lot of distortions in the economy right now, I do think that many households are starting to cut back.  They almost have no choice, as wages have not kept up with prices.

It is quite reasonable to think that the rate of price increases will go down.  This will most certainly be true when it comes to asset prices (stocks and real estate).  But if the Fed keeps following through on tightening, we could see consumer prices slow down.  It doesn’t mean that these prices will fall, but the rate of increase will fall.

In a recessionary environment, investors look for safety.  Long-term government bonds are considered really safe to own, unless you are the Russian government.

The only problem with long-term bonds is that they are bad during price inflation (i.e., a depreciating currency).  You don’t want to get a yield of 3% while your money is depreciating at 8%.

But even here, it isn’t a question of whether your return beats inflation.  It is a question of whether you can get a better return elsewhere.  It is better to take a 5% loss in inflation-adjusted terms than to put money in stocks and lose 25%.

I have been a long-time advocate of putting a portion of your investments in the permanent portfolio for wealth protection.  This is why the portfolio is made up of 25% long-term government bonds.  If long-term rates fall from here, the value of the bonds will go up.  And if long-term rates fall from here, it probably means we are in a recession and stocks will not be doing well.

This is all guesswork.  This is why the permanent portfolio is there.  It doesn’t take away all of the uncertainty, but it is a hedge against disaster.

I see some people who have poured money into crypto who are taking a major hit.

But even the index fund investors in the stock market are taking a hit right now.  Some of them are buying more.  They reason that stocks are on sale, so to speak, as they have already declined quite a bit this year.  But just because you’ve lost 20 to 25 percent on your stock portfolio doesn’t mean you won’t lose another 20 to 25 percent in the next 6 months as well.

At some point, I will actually look at buying and holding some stocks aside from the permanent portfolio.  This is not that point.  I want them to be truly on sale.  I still think there is a lot of air in that bubble.