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In the Bond Market, the View Forward Depends on How Far Back You Look 

Posted by Joseph Trevisani on Jan 10, 2018 8:07:15 PM

For most of the past year the yield on the 10-year Treasury has traded in a restricted 38 point range between 2.502 percent and 2.121 percent.  The widest spread for the past 14 months, to November 9th 2016 the day after the presidential election, is 61 basis points, 2.629 percent to 2.016 percent. 

10-Year Treasury Yield, 2 Years

2 yr jan 10.png

Looking back five years we see an absolute range of 172 points, 3.038 percent to 1.321 percent, with the bulk of activity around 121 points from 2.821 percent to 1.614 percent.  

10-Year Treasury Yield, 5 Years

5 yr jan 10.png

These restricted ranges and the absence of any directional trend are abnormal. The do not represent the market in Treasury yields over almost any comparable period prior to 2008. 

At the 10-year horizon the range expands to 297 points, 4.288 percent to 1.321 percent. The main differential being the historically normal rates in the first half of 2008 before the financial crisis. There is pronounced movement to lower yields throughout most of the decade as the Federal Reserve struggled to cope with the aftermath of the crisis and recession. 

10-Year Treasury Yields, 10 Years

10 yr 10 yr jan 10.png

In the 20 year time frame the range expands again to 555 points, 6.867 percent to 1.321 percent. 

What appears in the 10-year chart to be a Fed induced rate decline in reponse to the financial crisis, is revealed to be the  continuation of an overall trend that began in January 2000.  The singular Fed driven lows of 1.386 percent in  2012 and 1.321 percent  in 2016 are notable but the direction of yields is not. 

10-Year Yield, 20 Years

10 yr yield 20 yrs jan 10.png

The yield trend in fact dates to the early 1980s and the Volker Fed's successful quelling of the inflation that had been building for the previous 20 years, largely caused by unfunded government spending.  The 30 year range of 870 points, 9.9997 percent to 1.321 percent, leaves out the exceptional Fed tightening of 1980-85 which peaked at 15.395 percent in the 10-Year Treasury in September 1981. 

10-Year Treasury Yield, 50 Years

10 year, 50 years, jan 10.png

The long term decline of interest rates in the United States and most of the industrialized world poses a problem without an obvious historical solution.  Where should the 10-year yield be in an economy that by any reasonable standard is fully recovered?  Has the economy become dependent on rates that are, by historical parallels, extremely low?  

Another way to pose the question is has the linkage between economic growth and consumer inflation been broken? 

The post-war assumption has been that as growth accelerates it induces inflation, hence the Fed’s counter cyclical rate policy. But if there is one empirical fact of monetary policy established by the financial crisis and the Fed’s zero rate policy it is that the linkage through a proliferating money supply is not necessarily true. Is inflation, as it has been famously characterized, ‘always and everywhere a monetary phenomenon’? What if the economy continues to expand at 3 percent or more under the current accommodative regime and consumer prices do not accelerate?

Asset inflation is another question. Even with the economy's  improved prospects over the past year, it would be simplistic to argue that is the sole reason for the stock boom.  

The most striking aspect of the post-war history in the 10-year yield is the remarkable symmetry of the rate movement. Leaving out the inflation killing policy of 1980 to 1985 the mirror image is striking. From 1953 to 1980, 27 years, rates climbed from a low of 2.29 percent  to 10 percent. From 1986 to 2011, 25 years they declined, from 10 percent to 2 percent. 

The restricted range of the last six years has only one parallel. From September 1958 to March 1966 the 10-year yield moved between 3.71 percent and 4.87 percent, just 116 points.   

If the Fed governors are looking for a rate template, that is probably as good as any.

 

10-Year Yield, 1953-present

10 yr 60 yrs jan 10.png

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Thompson/Reuters

 

 

 

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