Here is a historical look at the US 10 Yr and CPI with Annual Percentage Change:

Click to enlarge
Under normal circumstances, interest rates will rise along with inflation. They more or less move in lock step. But ZIRP and QE means that these are not normal times. Thus, the FED’s intervention means that correlation has been at least temporarily broken.

This raises the question: Given the magnitude of the move in percentage terms, we must ask if the spike in yield signal “Tapering” or is it revealing the start of inflationary pressures?

As the end of QE approaches, we should see yields normalize. That suggests that Yield has plenty more upside room to grow.


Note: We are underweight bonds



Proof the Bond Bull is Over: PIMCO Selling Hedge Funds (August 29th, 2013)

Ralph Dillon

Category: Federal Reserve, Fixed Income/Interest Rates

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.

16 Responses to “US 10 Year, CPI, and Annual % Change, 1791-Present”

  1. jeffj900 says:

    Allow me to demonstrate my ignorance. Can anyone explain the CPI chart after 1984 or so? Is the top half nominal, while percent change is in real terms? Or is something else making the apparent growth of the index vs. low annual change appear haywire?

    • Frilton Miedman says:

      Coincides with the rise of debt starting with Reagan, fueling artificial demand at the same time without the wage growth to support it.

  2. Frilton Miedman says:

    A chart of household wages v debt would complete the picture above in my opinion.

    Within my portfolio, I’m short T’s, long energy. commodities & materials, while short frothy equities.

    I can’t see how fiscal (not Fed) policy can continue to ignore the wage to debt dilemma, not with household debt to income ratio’s somewhere around 135% while wages and U/E continue to fall

    I see some serious political battles about the definition of Socialism in the years to come as labor demand continues to diminish as a result of globalization and technology.

    We can’t continue an economy that supports demand with continually cheaper and cheaper debt, something’s gotta give and cannot always be the Fed.

    Regardless how much political redistricting, or voter disenfranchisement, as the % of population that’s increasingly aware of this grows, campaign platforms will contain rhetoric to appeal to those votes, Koch brothers, ALEC et al made the huge mistake of forgetting Lincoln’s statement that you can’t fool all the people all the time.

  3. rd says:

    We haven’t had significant deflation periods since WW II. Rarely has it gone below 1% since then, so why would we expect to have 10 yrT-bond yields below 3% unless the Fed is trying to inject a lot of stimulus like it has been? A CPI of 1% to 2% would normally result in 10-yr yields of about 3%-4%.

    Barring a recession with very low inflation or deflation I expect to see the 10-yr yield to be in the 3% to 4.5% range over the next few years which would be in the low to median range of it over the past 70 years. If the economy can’t support that value, then the recovery is clearly very fragile and we will likely end up with a significant recession.

    The hand-wringing over this indicates to me that the financial markets have become addicted to Ben’s financial crack cocaine.

  4. bramsay says:

    This is really a bad presentation. The yield charts are annual yields, while the main CPI chart is total change since 1790- and it’s not even on a log scale. Ditch the main CPI chart and blow up the CPI annual change chart an put it on the same scale and use bars like the yield ones and you’ll be able to quite clearly see that no link has been broken. Right now we have low inflation, and yields are low.

    • The yield charts are annual yields, while the main CPI chart is total change since 1790-

      No, the 3rd chart is Constant Maturity and gives you yearly percentage change — CPI also gives you yearly percentage change.

      it’s not even on a log scale.

      Why would you put yiled ranging 0-15 on a log scale? Even CPI is 0-240. Log scale would be a long line with a big spike at the endm whi9ch is not vbery revealing of anything.

      The point is that there has been a huge spike in rates in percentage terms, while inflation is low. THATS what makes this interesting.

    • rd says:

      What leaps out of the CPI total chart is the importance of the two step process (Roosevelt and then Nixon) going off the gold standard which resulted in sustained inflation. Before Roosevelt took his actions, net inflation over time stayed relatively constant by cycling inflation (boom) and deflation (bust). The Nixon moves along with the rest of the world becoming more competitive with the US kickstarted the sutained inflation over the past 50 years.

      In general, we have largely been able to avoid the big deflationary busts that were devestating in the late 1800s and the early 1900s. However, financial crises after periods of over-confidence in Wall Street’s ability to police itself cause considerable damage to the overall economy.

  5. 4whatitsworth says:

    I try and follow the actions and effect of the Fed and it does seem like it discovered the printing press in the 60’s and now monetary policy and politics are linked forever. I suppose if I were king and I discovered I could just print money and give it the presents in the form of welfare and social services and give it to my friends in the form of government jobs and tax breaks it would be awfully tempting to just keep printing.

    As for bonds I wish I knew how this all ends I am thinking about increasing my position in short term high yield at the moment because the US stock market seems awfully frothy. If the government keeps the abundance of printing up there will not be much of a demand for barrowing so rates stay low. Also inflation will make the stock market and real-estate returns look better than they are.

    I guess my question is why would the government stop giving away worthless paper as long as there is perceived value (low inflation)?

  6. d_dd says:

    I am not convinced bonds are rising.
    Rates have declined at the end of each phase of quanitative easing.
    Pull a chart of the Japanese 10 year.

  7. RW says:

    The yield spike still looks like an overreaction to me.

    There certainly doesn’t seem to be much investment upside in bonds these days, other than defensive that is, but I am aware of no plausible model or mechanism for inflation in our current situation.

    More substantively, what model or mechanism accounts for treasury yields rising or falling with inflation anyway? Other than the same mechanism that accounts for QE and ZIRP I mean.

    The notion that the Fed’s “intervention” broke some longstanding relationship seems rather suspect; how is that supposed to work, exactly.

  8. pekoe says:

    What I do not understand is the progressive increase in the year to year volatility of interest rates, beginning in the 1920s and ever increasing up to now? Seems something very basic has been changing in the world and is still accelerating. What is that?

  9. cblock001 says:

    Amazing how stable both interest rates and CPI were under the time of the “classical gold standard” which is usually defined as: “The period from 1880 to 1914 is known as the classical gold standard. During that time, the majority of countries adhered (in varying degrees) to gold. It was also a period of unprecedented economic growth with relatively free trade in goods, labor, and capital.”

    • Angryman1 says:

      Then came a bigger period of economic growth after the end of the gold standard. Most of that growth was due to the industrial revolution. It better had grown, but the inequality was so large, it makes today look like a utopian society. The lack of innovation and war=bye bye gold “catholic” standard.

  10. Angryman1 says:

    QE is nothing. While they say they are buying the money base at “85″ billion a month, it is only 85 billion EVERY Month. No continuing purchase. You get what that means? The US swaps 4000 billion dollars worth of assorted treasuries(governmental, MBS, Muni ete ete) every month. That means every month the FED “buys” a pathetic 85 billion of that.

    In otherwords they are doing nothing. Absolutely nothing. They aren’t controlling or doing anything. This is indeed normal times and inflation is beginning to bubble(and that is a good thing) as the market gets closer to clearing. When it clears, inflation will accelerate quickly ending Zirp in classic form.

    The government has a data mess on its hands imo. While they have had some hedonic issues before, they may need revisions that won’t be politically “pretty”. That is the price you pay not to fund these departments. Less boots on the ground=more guessing.