Dhaval Joshi is clearly in the deflation camp. Bloomberg’s Chart of the Day references his recent RAB Capital sovereign debt commentary as suggesting bond yields are set to “massively collapse.”

Here’s an excerpt:

“Yields on U.S. and U.K. government bonds have room to “decline massively” if history is a guide, according to Dhaval Joshi, chief strategist at RAB Capital Plc.

The CHART OF THE DAY displays the differential between yields on 20-year debt and benchmark interest rates in the two countries, according to data compiled by the Federal Reserve and Bloomberg. Joshi made similar comparisons in a Sept. 3 report.

“Interest rates cannot go up meaningfully for a very long time” in either country, the report said. U.S. Treasury yields have yet to fall far enough relative to the Fed’s target rate for loans between banks to reflect this prospect, he wrote. The same holds true for yields on U.K. gilts by comparison with the Bank of England’s base rate, in his view.”

I  haven’t gone that far — but I suspect the fear trade into bonds will end badly.


Government-Bond Yield Gap vs Benchmark Interest Rates

click for larger chart

Do US Bonds Resemble Dot Com Stocks? (August 18th, 2010)

U.S., U.K. Bond Yields Set to ‘Decline Massively’: Chart of Day
David Wilson
Bloomberg, September 7, 2010

Category: Federal Reserve, Fixed Income/Interest Rates, Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

9 Responses to “Government-Bond Yield Gap”

  1. X on the MTA says:

    I recently did an analysis of the 30-2 gap, published here The mean is 90bp with a standard deviation of 117bps. Currently the spread is at 319bp, which is really close to it’s all-time high of 384.

    if i had to put my hand in the fire i’d say the gap the spread will be under 200bp by this time next year. (disclosure: i have a dinner tab riding on this one)

  2. Robespierre says:

    “but I suspect the fear trade into bonds ” and when that happens where will the “fear” put the money on? Stocks? Gold? Oil? because I don’t think “fear” is about to go away any time soon.

  3. Dapple says:

    I have seen a number of people claim that the USA may be in for what Japan has gone through the past 20 years i.e. Interest rates at close to 0 % for the long term. This should keep this bond rally going a long time. Any thoughts on this Barry ?

    Also, regarding shorting treasuries, other than the leveraged ETF’s which just seem to carry too much risk with rebalancing factors erasing profits if/when the market turns, can you suggest a way to trade this short ? Could shorting the Yen vs Dollar be an idea ?



  4. machinehead says:

    Nothing compels the 20-year yield to fall to the authorities’ policy rate. Twenty years is a long time to expect stable prices.

    Apparently the Federal Reserve, like most central bankers, targets mild inflation of around 2% to avoid situations like today’s — where the policy rate falls to zero, but rates still aren’t sufficiently negative to stoke a recovery.

    If you take the Fed’s 2% inflation target seriously, and desire a 2% real yield, then you shouldn’t accept less than 4% yield on a 20-year bond.

    It’s amazing how people take transient current conditions as a proxy for a 20-year period. Who could have imagined in 1990 — a year when the long Treasury yield reached 9% — that it would be under 4% this year?

    My fearless prediction: by 2030, we’ll have seen 9% yields again for sure — and maybe 19% as well. Best of luck to the Boomer Bond Bubblers!

  5. Broken says:

    So, a lot of people are betting on a secular bear of 20 years or more (starting from 2000). The 1969-83 (secular sideways?) market took 17 years to start a new secular bull. The 1929 crash took 26 years to break new ground but only 13 years to start a new secular bull.

    I am not that gloomy, but if enough people have a vested interest in a “Japan scenario” it becomes somewhat self-fulfilling. Too much political pressure on the Fed to make low inflation the over-riding priority.

  6. VennData says:

    “…if history is a guide…” is about as solid as support as you can have. History always an excellent way – if not THE best way – to evaluate future investments.

    That’s why the Forbes 400 is littered with historians.

  7. I like this take, by BR, above

    “I haven’t gone that far — but I suspect the fear trade into bonds will end badly.”

    w/the proviso: the ‘Nazz’ did get to ~5100..

    “Best of luck to the Boomer Bond Bubblers!”


    peep have two Options, in this ‘Market’, for the duration..

    1. Learn to Trade (Financial ‘Assets’)
    2. Learn to Trade (Merchantile estilo, ‘Goods & Services’)

    ‘passive “Wealth”‘ is going to get ground into Dust..

  8. ubiktwo says:

    I do not get it– Japanese yields on 10yr notes in 1995 were 4.5% today they are 1%. Quis est a ebullio? Seems to me– you can fall on the ground and not get back up.

  9. IvoZ says:

    You should read a bit of Steve Keen. There he shows that it is not the Fed that decideds the fate of the ‘flation, but bankers, because 1) bank credit leads base money (and does not depend on prior base money printing for its expansion; the reserve requirement is a joke; capital constraints and hidden losses are more of a current constraint); 2) bank credit is many times bigger than base money. Banks were unwilling to lend until recently, but now they have become somewhat more willing, but demand for credit is still low. So the Fed is really powerless (except in so far as to help lower UST yields) and provide cheap refinancing to banks, but it is banks that decide the fate of inflation / deflation.

    Banks have us in their hands, not only via purchasing the government, but also by dictating the path of this debt dependent economy.