YOUGHAL, IRELAND – U.S. Treasury bond prices got a lift on Tuesday, with the 10-year yield falling below 1.7%. (Remember, when yields go down, bond prices go up.)
In August of last year, the yield on the 10-year was only 0.51%. But since then, it has been heading up. Now, even after the recent dip, it’s still more than three times that.
And the quarter just ended was the worst for Treasuries in almost 40 years. Not since the 1980s have yields risen by so much, so fast.
That move – before investors took former Federal Reserve chairman Paul Volcker seriously – proved to be the last gasp of the last bear market in bonds, that had begun three decades earlier.
Not that we know anything you don’t know. But this latest move over the last quarter looks like the first gasp of the next one.
And investors will soon learn that their faith in current Federal Reserve chair Jerome Powell and Treasury Secretary Janet Yellen is a mistake.
A Bird in the Hand
U.S. Treasury bonds trade on the full faith and credit of the issuer – the United States of America.
We’ve been exploring the decline of the U.S. empire this week. If we’re wrong about that, we may be wrong about this, too.
Perhaps faith in the credit of the U.S. will increase. But to make a long story short, our guess is that Treasury bonds have a lot more bad quarters coming.
After all, a U.S. Treasury bond is a promise to pay the lender back with a stream of U.S. dollars. Currently, that stream is enhanced by a yield of the aforementioned 1.7%… more or less.
But it is reduced by the uncertainties of the future… and by consumer price inflation.
“A bird in the hand is worth two in the bush,” is the old expression. The ones in the bush might fly away before you get your hands on them.
And if you get hit by a runaway Amazon delivery van, you might not enjoy a single penny of the money you invested in U.S. Treasury bonds.
The yield (the money you receive in interest) is supposed to offset those risks. That is, it is supposed to close the gap between the birds, making those in the bush at least as valuable as the one in hand.
But currently, the yield on the U.S. 10-Year Treasury note is almost exactly even with consumer price inflation (as of February 2021, CPI stood at 1.7%)… which makes those bush birds look like they are not worth chasing.
In other words, you have the risk of Amazon trucks, COVID-19 infections, war, depression, and all the other curveballs the future may throw at you… but no reward for taking a swing at them.
Why that is a bad deal scarcely needs elaboration. Why it might be an even worse deal than you think is today’s subject.
Rising Prices, Falling Supply
To make the short version of the long version a little longer, our guess is that the primary trend for U.S. bonds is down (rising yields)… that this trend is likely to last for five… 10… or 15 years… and that it will be clearer in June than it is now.
First, after 40 years of disinflation… lo!… we’re beginning to see a turnaround. Soybeans are up about 66% since this time last year. Copper is up some 82%.
Of course, oil prices are up. Last year, at this time, oil had a negative value. Today, a barrel of West Texas goo sells for $59.
Rare metals? Not-so-rare metals? Food? Finished goods? Almost everything is becoming more expensive.
And as reported in this space last month, merchants are trying to cut down the sizes of their products to disguise higher prices.
Some of this inflation is blamed on “supply chain problems.” Or COVID-19 repercussions. Or an expanding economy (cyclical inflation).
But however much these things have caused prices to rise, a more ominous cause of inflation is structural. (Our colleague and coauthor Dan Denning explains this more fully in our most recent Bonner-Denning Letter. Paid-up subscribers can catch up here.)
That is, the feds are causing inflation intentionally, by passing out too much money.
It’s good politics, from their point of view – it buys votes.
They say it is good economics, too; they claim it stimulates the economy.
And it’s good monetary policy, too… at least in the perverted terms of federal finance.
While U.S. Treasury bonds are considered an asset by those who own them, they are a liability for those who issue them. And the higher the real value of those bonds, the greater the feds’ real debt burden.
The U.S. government is the biggest single debtor in the world. The U.S. government now owes $28 trillion. And it must have occurred to the geniuses at the Treasury and the Federal Reserve that – at some point – inflation is like a no-fault debt jubilee, erasing trillions’ worth of federal obligations.
The feds will keep paying the coupons, as required by law. But the dollars will steadily lose value. And creditors – big companies, little companies, savers, foreign governments, retirees – won’t know whom to blame.
But it hardly matters what they think. The feds have fallen into a debt trap. It’s “inflate or die.”
Looking ahead, there is almost zero chance that they could back off from their big-spending, big-borrowing, big-printing boondoggles – even if they wanted to.
And since this fake-money-spending will increase demand and decrease supply – by absorbing resources… misleading investors… and reducing capital investment – you should expect higher rates of consumer price inflation.
Second, bond yields (and prices) are not determined by the feds directly, but are discovered in the bond market.
That market has been relatively quiet for the last year or so, because the federal government hasn’t borrowed much money. It went on a borrowing spree last spring, when the Trump administration added $3 trillion to U.S. debt in just a couple months.
By July of last year, the Treasury General Account (TGA) was flush with $1.8 trillion. And it hasn’t needed to raise major funds since.
But that account is falling fast. The TGA is down some $607 billion in the last two months and has only about $1 trillion left. It will soon be depleted.
Meanwhile, the feds passed Biden’s Big Bailout for $1.9 trillion… And now, they’re looking at $2.3 trillion more in “infrastructure” spending.
So, it’s back to the debt markets… probably in June.
We are not making a prediction. And we are certainly not offering a recommendation.
But if we owned any U.S. bonds – which we don’t – we’d sell them now.
Like what you’re reading? Send your thoughts to [email protected].