Since late 2008, the long Treasury yield has had two anchors: The
Fed's ZIRP policy for short rates and low or non-existent inflation.
The Fed maintains that it intends to keep short term rates either
at zero or nominal levels for an extended period of time, and the
CPI, although having risen from its cyclical low since the economy
started to recover, remains below the all time peak level set in
The 30 yr Treasury yield did rise sharply from exceptionally
depressed levels at the end of 2008 with the uptrend continuing
right on into April, 2010. The market responded to the development
of economic recovery and sharp rises in all the cyclical pressure
gauges, with the yield running up to 4.8%.
The yield has fallen sharply since then as the leading economic
indicators have weakened and the cycle pressure gauges have eased.
Moreover, the market is now anticipating further weakness in the
economy and a likely continuing deceleration of inflation pressure.
In fact, bond market players may now be expecting that the CPI
could again go negative yr/yr on a further slowdown of the
The Treasury is overbought on technical and fundamental grounds
but the rally action is not irrational as the market is discounting
further economic weakness and is growing more confident that the
economy is near to leveling off or worse.
The trick, if you are invested in or are long the bond market on a
trade, is to realize that the market can turn on a dime if data
pointing to a fresh bounce in the economy are reported. Not only
that, but yields can run up very quickly if players perceive a
change in economic momentum to the positive. You need to pay
even closer attention now, because the Treasury market has
started to run ahead of the fundamentals, however muted they
There has been much talk again recently about whether the
Treasury market is a bubble market. I do not find such discussions
to be useful. To be a bear on Treasuries translates into expecting
economic growth that will bring increased inflation and eventual
higher short term interest rates that will trigger substantially
higher bond yields. For that we need to see signs that the
economy is set to experience a re-acceleration of growth.
30 yr Treasury yield chart.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!