Keeping an Eye on the Bond Market
December 3rd, 2008 by Buck Woodford
It does not portend good things to come. And that’s my #1 reason for exercising extreme caution in the equity markets right now.
Below are charts of 10 yr Treasury yields (just move the decimal one place to the left and that’s the actual % yield). The first one shows the last 6 months while the second spans the last two decades .
6 months.. Daily bars:
20 years.. Monthly bars:
Yields have now broken solidly below the 3.07% “panic” all-time low in 2003. My working assumption now is that 3% will now be a ceiling, not a floor, for the 10yr going forward.
The 20 year chart shows how yields have plunged into completely new territory these last few weeks. And since very short-term (3 month) Treasury bill yields have been steadily hovering around zero% for a while, this drastic move represents a curve flattening (much to Julian Robertson’s chagrin, I feel sure, as he has been betting on a steepening yield curve).
Further, the TIPS spread has collapsed, implying expectations of little to no inflation in our future. Curious sidenote: In searching for quotes on the TIPS spread, I found it interesting that the Federal Reserve of Cleveland has temporarily discontinued tracking it. That’s plain odd.
There are logical fundamental reasons behind these moves. And, not surprisingly, they are far from positive.
Demographically, the US is now similar to Japan when they started their 20 years worth of slow/no growth and miniscule bond yields. First, we’re an aging population with a large wave of retirees on the way. Second, we are supporting “zombie” companies like Fannie Mae, Citibank, AIG, and now probably General Motors. The political inability to accept losses and allow the economy to experience cleansing effect of much-needed company bankruptcies is nearly identical to Japan’s failed methods of propping up insolvent companies.
Nothing is certain, but it’s not at all out of the question that a similarly languishing future awaits us. Scary stuff. Please share any of your thoughts in the comments section.
