The 30 yr Treasury long term bull market has not yet ended. It reflects decelerating US economic
growth momentum in terms of industrial output and long run slides in inflation momentum and
short term interest rates. These same factors govern the trend slide in yields as seen on the chart.
Recent data show production at 0.9% yr/yr, the CPI at 0.2%, and the 3 mo. T- Bill near the zero
bound. With a nearly stalled economy, no inflation to speak of and ZIRP, it is reasonable to put
the short term yield band at 3.00 - 3.50% for the bond to represent the premium for all the
unknowns in its prospective 30 year tenure. The bond market has become increasingly accepting
of the Fed's ZIRP over the past five years, and players have also bought off on the persistent down-
ward drift of inflation since 2011 and the slowdown in the growth of industrial output. Ergo, the
T - Bond sits at around 3% presently.
Over the next six months, if there is no further significant erosion in the price of oil and other
sensitive materials prices, the CPI could well "back into" a yr / yr level of near 2%, and the Fed
may move to raise short rates if there is also a modest improvement in real output growth. This
could lead to the sort of sharp run up in the yield % as was seen from 2012 to the end of 2013
when market players guessed (incorrectly) that large QE from the Fed would trigger faster
economic growth, accelerating inflation and an eventual abandonment of the Fed's ZIRP. But it
need not unless the real economy strengthens enough to convince investors and traders that the
US is experiencing a positive reversal in growth of substance. So, I come out the door that
upward pressure on the bond yield will depend most heavily on the perceived sustainability of
of an improvement in real output growth.
At present, there are just a few hints the economy may soon get past the difficult period of excess
inventory experienced over the past several odd months, but that awaits some confirmation.
Naturally, if we do see a somewhat stronger economy in the year ahead, there should be enough
follow through on inflation to push the Fed to raise short rates gradually. If such occurs, it
may be necessary to scuttle the 3.00 - 3.50% yield band for the bond shown on the 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 !!!