Wednesday, October 20, 2021

Bond Buyer's Arithmetic

 Very short post today. 

Should you buy bonds right now?

Inflation is at 5.4% and 3 year Treasury notes yield 0.723%.  

Let's accept the Fed's 400 PhDs prophecy (see previous post) which predicts that inflation will dip back to 2% in 2022 and out. Further, let's assume that inflation has already peaked and that for the rest of this year (3 months left) it will average 4% annualized.

So, during the next 3 years your money will lose purchasing power as follows:

Rest of 2021: 1%

2022: 2%

2023: 2% 

9 months 2024: 1.5%

Total for 3 years: 6.5% (ignoring compounding)  

If you buy the 3 year Treasury note right now you will make 3x0.723% = 2.17% in interest.

Thus you make      2.17% - 6.50% = -4.33% a negative real return 

Should you buy the 3 year Treasury note, even if you believe the Fed's 400 inflation projections? 

  1. Yes, but only if you believe there is an imminent economic collapse which will result in massive deflation. 
  2. No, you're not a fool to give money away.

In case #2, what interest do you want to receive TODAY as a minimum per year just to break even? Easy arithmetic: 6.5%/3 = a little over 2.1% 

Looking at the chart of the 3 year Treasury yield...


The corollary is that the Fed's constant manipulation of the bond market through QE has created a Catch-22 situation, where we either go into a deep deflationary recession or allow interest rates to rise very significantly above current levels, also likely creating a recession through a bubble collapse.

Welcome to Modern Economics. 

PS... remember the "soft landing" meme back in 2006? I'm willing to bet that's exactly what the Fed and Treasury are hoping for today as well.  How did that work out in the past, eh?



  1. add climate change and political instability and we are entering a very, very, very, long winter... who knew that we would be the last children of summer...

    I think George RR Martin could feel the state of society when he wrote game of thrones...

  2. btw, is the Japan scenario possible? where QE just goes on and on and on and on..

    1. I don't think so.. for one, the USD is the world's reserve currency and cannot keep on getting diluted forever. For another, Japan's debt is almost entirely domestic, ie the Japanese families are champion savers. That's definitely not the case in America.