Wednesday, April 14, 2021

Mind The Gap... Tomorrow

 For over 30 years - closer to 40, actually - the yield on 10 year Treasury bonds easily exceeded inflation, making US government bonds an attractive investment for conservative investors like pension and sovereign retirement funds. The benefits to the United States were obvious: the dollar maintained its preeminent position as reserve currency. 

But, no more:  as we see from the chart below annualized CPI inflation (blue bars) is running way above Treasury yields (red bars) - that’s where the arrow is pointing. If you can’t see the red bars in the last part of the chart,  it’s not a mistake: yields are way too low to show up. It’s the largest and longest “gap” since the 1980s, and back then it was a healthy reaction/expectation that inflation would cool fast because of the very restrictive monetary policy.

The reason is, of course, the current Fed/Treasury unholy alliance which has the central bank following the loosest monetary policy in history.  Printing furiously, keeping short rates at 0% AND buying $120 billion bonds per month.  It’s all about the Modern Monetary Theory, which goes like this: it doesn’t matter how much and how fast we print money because in the future the economy will expand even faster and will absorb the money without causing inflation. A strategy also known as wishful thinking...

Putting it in medical terms, it doesn’t matter how much you smoke, drink and eat now because down the road you will do what is necessary to be healthy. 

Hmmmm... Like Annie would say: Tomorrow... tomorrow...


  1. Equities are in a complete meet-up phase, I think the inflation hedge component is a part of it.