Tom McClennan notes that back in the good ol’ days yields on Treasuries were “compared to silly things like the inflation rate, dividend yields, mortgage rates, etc.”

More explicitly, he observes:

The key driver for valuing Treasury bonds at the moment is the utility they offer as a form of collateral among banks loaning money to each other. So with Europe’s debt markets in even greater turmoil now than when Greece’s debt got a “haircut” last year, T-Bond prices are zooming up once again to the top of the 3-decade rising trend channel.

When does this end? Tom’s guess is “when the Fed’s inflation of the money supply turns into actual consumer price inflation.”

 

Source:
Full-On Panic Into T-Bonds
Tom McClellan
McClellan Market Report, June 01, 2012  
http://www.mcoscillator.com/learning_center/weekly_chart/full-on_panic_into_t-bonds/

Category: Fixed Income/Interest Rates, Valuation

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.

22 Responses to “How Expensive Are US Treasury Bonds?”

  1. sellstop says:

    We can’t seem to BUY inflation. I remember when we were all scare of the effects of wage inflation. But we won that war!

    A good book: “From Financial Crisis to Stagnation” by Palley

    Killing labor means we can’t get the money to the people anymore.

    http://ghickeyblog.blogspot.com

    gh

  2. ToNYC says:

    “when the Fed’s inflation of the money supply turns into actual consumer price inflation.”

    And that actual CPI is being most keenly experienced in services rendered by individuals ,i2i, or p2p, and last “noticed” by institutional and corporate metrics. The meaning is evolution and moving along regardless of any individual need for any particular meaning .

  3. ConscienceofaConservative says:

    Jeff Grundlach has a great quote on treasuries, at these near zero he compares it to getting a suit case full of cash at maturity. If you’re not getting paid to lend out money to the U.S. Treasury , why not just hold the suit case of cash yourself now?

  4. Woj says:

    Treasury yields are ultimately the average of expected short-term rates over the duration of the bond. Apart from the Fed expecting to hold rates near zero through 2014, the change in monetary policy to paying IOR may allow the Fed funds rate to remain near zero far longer. As expectations for indefinitely low rates get pushed out further, yields will continue to fall. 2% on the 30-year seems like a reasonable target, but at current rates that makes buying long-term Treasuries not especially attractive.

    I have a recent post, Permanent Zero: Record Low Treasury Yields and Banking Instability, on the matter.

  5. NoKidding says:

    As long as the federal reserve is buying and the treasury is selling, it seems like rates could stay low right up to the point where interest on debt exceeds the fiscal deficit. At that point the government’s ability to raise revenue and the competitiveness of the rate will matter again.

  6. Joe Friday says:

    sellstop,

    We can’t seem to BUY inflation. I remember when we were all scare of the effects of wage inflation. But we won that war!

    HEH

  7. RW says:

    How expensive are Treasuries? Very. But demand is still increasing so they will become more expensive yet.

    How much more expensive could they get? Lots. If depression becomes global the number of people eager to buy safety even when real yields are negative will increase geometrically; in fact they already are.

    NB: No one has successfully demonstrated a direct causal link between money supply (AKA monetary inflation) and a change in the general price level (AKA consumer inflation) so wondering when this could happen is not very useful; i.e., doesn’t matter how much money is out there if people are afraid to spend it and hoarding bears little or no carry cost.

    Right now the price of labor (AKA worker income) is still the biggest component of the general price level but as sellstop avers, “we won that war” — wages are going nowhere — ditto for commodities (AKA materials) now that economic contraction is becoming global and ditto for commercial pricing power too. We are in a demand crunch and neither monetarist nor supply-side approaches have any traction attempting to counteract it; just more pushing on a string.

  8. eddiebe says:

    The insiders know why the bond is going up, and it will become obvious to most of us soon enough. When it’s too late to do anything about it but burn.

  9. Bernie X says:

    “Fed’s inflation of money supply…” ???

    USD M3 is at the exact same level as Dec 2008.
    The Fed hasn’t increased USD M3 in over 3 YEARS.

  10. Don Levit says:

    Well, it depends on which Treasuries you are talking about.
    For example, the special-issue Treasuries were supposed to remain intact within the Social Security trust fund. Instead of $2.7 trillion of surplus, there is $2.7 trillion of unfunded collateral, for instead of being left intact, the excess FICA taxes (and “interest”) were loaned to the Treasury to pay for current expenses.
    Instead of serving as a store of wealth, the trust fund is a hollowed-out store of unfunded IOUs.
    To redeem the cash shortfall, as reported by the latest Medicare Trustees Report, new revenues must be raised – the same way we pay all expenses, whether in a trust fund or not.
    Don Levit

  11. TLH says:

    How many buyers are left? Will the exits be big enough?

  12. farmera1 says:

    Here’s another part of the picture. The velocity of money has been falling for decades. The cost of labor has been arbitraged away to those other people over seas. The 1%ers can only spend so much and many like Romney take their money over seas.

    http://www.bullandbearwise.com/VelocityChart.asp

  13. Mike in Nola says:

    Don’t know about others, but My treasuries have gotten very expensive and I love it :)

  14. [...] How expensive are Treasury bonds?  (Big Picture) [...]

  15. “…Instead of serving as a store of wealth, the trust fund is a hollowed-out store of unfunded IOUs.
    To redeem the cash shortfall, as reported by the latest Medicare Trustees Report, new revenues must be raised – the same way we pay all expenses, whether in a trust fund or not…”

    the *Truth of it.

    Madoff is a Piker, and, merely a Distraction (not to minimize the consequences of His actions..)

  16. Joe Friday says:

    Don Levit,

    For example, the special-issue Treasuries were supposed to remain intact within the Social Security trust fund. Instead of $2.7 trillion of surplus, there is $2.7 trillion of unfunded collateral, for instead of being left intact, the excess FICA taxes (and ‘interest’) were loaned to the Treasury to pay for current expenses. Instead of serving as a store of wealth, the trust fund is a hollowed-out store of unfunded IOUs.

    No.

    Once again, the assets in the Social Security Trust Funds have not moved and are exactly where they belong.

    The “special-issue Treasuries” that the trust funds invested in are not only not just mere “unfunded IOUs“, but are in fact THE most privileged of Treasury securities issued by the U.S. Treasury, and are REDEEMABLE AT ANY TIME AT FULL FACE VALUE, unlike any other security that they issue.

    If instead of investing in treasuries, the trust fund had invested in German government bonds, would you consider those to be “a hollowed-out store of unfunded IOUs” ?

  17. Don Levit says:

    Joe:
    You say the assets have not moved.
    According to the Social Security Administration, not only have they moved, they have merged in the Treasury with other revenues and spent!
    From a paper entitled “Trust Fund FAQs:”
    Page 1 “The Social Security Act limits trust fund expenditures to benefits and administrative costs.”
    “All securities held by the trust funds are ‘special issues’ of the U.S. Treasury. Such securities are available only to the trust funds.”

    Now, if that was true, the money would have not moved.
    However…
    Page 2 “Tax income is deposited on a daily basis and is invested in ‘special-issue’ securities. The cash exchanged for the securities goes into the general fund of the Treasury and is indistinguishable from other cash in the general fund.”
    “Because the government spends this borrowed cash, some people see the trust fund assets as an accumulation of securities that the government will be unable to make good on in the future.”
    I am not saying the government will not honor its obligations. I am simply saying that, from a cash perspective, the trust fund is empty.
    If that was not true, then the bonds could be liquidated without new general revenues being used.
    You referred to German bonds.
    I do not know how the excess FICA taxes could have been invested in order to provide the interest, so that the principal and interest could have been spent only for the trust fund benefits and administrative costs.
    I did not write the law.
    It certainly isn’t conserved when the entire trust fund is borrowed by the Treasury, and spent for other expenses.
    http://www.ssa.gov/oact/ProgData/fundFAQ.html.
    Don Levit

  18. Don,

    this..”…from a cash perspective, the trust fund is empty…”, is the, simple, Truth of the matter..

    the, willingly, Blind, like ‘Joe Friday’, will not See.

    as an fyi, this ‘Road’ has been well-traveled..

    Mr. Friday keeps with the same ‘Song’

    though, he can’t get in tune with the *Reality.. as seen, here..

    http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus-ns-aaf&v%3Aproject=clusty&query=%22And%2C+It%27s+Gone%22+South+Park

  19. Joe Friday says:

    Don Levit,

    You clearly have no comprehension of how a bond works.

    * When you invest in an IBM bond, IBM gets your money, which they mingle with all their other monies and can spend however they like, and you get their bond.

    * When the trust fund invests in a treasury bond, the treasury gets the money, which they mingle with all their other monies and can spend however they like, and the trust fund gets the treasury bond.

    the trust fund is empty.

    That would be news to the trust fund. If you check HERE, you can see for yourself that the trust fund is quite full.

  20. Don Levit says:

    Joe:
    That table shows the securities that are in the trust fund.
    It says zero about how those securities are redeemed.
    FDR wanted the SS system to be self-supporting, with no use of general revenues.
    From an accounting perspective, the trust fund is full.
    From a cash perspective, it is empty.
    Please tell everyone how all those securities listed in hat Table are redeemed?
    Are they simply liquidated, or are they purchased with new general revenues, the same way the government pays all pay-as-you-go expenses, whether in a trust or not.
    Don Levit

  21. Futuredome says:

    When will it end? When deleveraging ends and money pours back into the financial sector making its solvent or the government increases purchases enough to offset.

  22. Joe Friday says:

    Don Levit,

    That table shows the securities that are in the trust fund.

    Bingo !

    And the trust fund is certainly not “empty”.

    It says zero about how those securities are redeemed.

    Because they are redeemed in exactly the same manner as all the U.S. Treasury securities held by banks, mutual funds, pension funds, insurance companies, brokerage firms, and ordinary Americans are redeemed.

    Where’s the mystery ?

    FDR wanted the SS system to be self-supporting, with no use of general revenues.

    It doesn’t. It is self-financed.

    From an accounting perspective, the trust fund is full.

    From a REALITY perspective the trust fund is full.

    Please tell everyone how all those securities listed in hat Table are redeemed?

    In addition to what I’ve already stated, they are redeemed in the same manner a corporate bond is redeemed. Again, you don’t seem to comprehend how a bond works.