Bond yields are just so damn low…what is that telling us?

July 6th, 2016 at 8:51 am

I pour the morning cup of mud, schlep out to the stoop to get my paper, and open my WSJ to learn that the yield curve is awfully flat (i.e., the difference between the interest rates of bonds of different maturities is low). In fact, the yield on the 10-yr–1.367% yesterday–is the lowest on record. And the difference between the 10 and 2-yr Treasury yields, at about 0.8, is the same as it was in November, 2007.

Source: WSJ

Source: WSJ

Not good, and very much worth noticing. There are those who will tell you the yield curve is a revealing recession indicator and that a narrow 10/2 year spread is flashing red. But now isn’t late 2007. Most importantly, of course, the housing bubble was imploding back then, whacking bank portfolios, wiping out trillions in wealth, and generating both a credit freeze and a demand-killing negative wealth effect. Also, the Fed funds rate has been at or near zero since around 2009, so that’s also very much in the mix here, holding down Treas yields.

One must be steely-eyed in these circs and avoid unnecessary bedwetting. On the negative side, along with the flat yield curve, we have:

–the strong dollar: it hurts our trade competitiveness and puts downward pressure on inflation and thus props up the real interest rate;

–volatile markets/uncertainty: surely a bigger problem for the UK than us/US, but watch our equity markets for wealth effects; still, credit flows here seem largely untouched;

–possible weakening job growth: that’s a big one of which I’ll have more to say later this week.

On the plus side:

–low unemployment, a bit of wage growth, and low inflation, while a problem re propping up real interest rates, is helping paychecks go further;

–growth: kind of the bottom line here, and while it’s been bumpy, we’re basically posting growth rates of around 2%, yr/yr, which ain’t great (and reflects a nasty downshift in productivity growth) but is actually the envy of most other advanced economies right now.

Two other things. I suspect the probability of a near-term recession remains relatively low here, well below 50%, though who knows? But what I’m absolutely certain of, as I wrote here, is that we’re not ready for it, either re monetary or fiscal responses.

Finally, I couldn’t be more flummoxed by this next point: these historically low Treasury rates amidst sluggish growth and an engine of job growth that could be downshifting are absolutely SCREAMING for policy makers to borrow and invest in public infrastructure. That would help on many levels now, from labor demand to productivity.

I won’t make free lunch arguments, but given these yields and the potential benefits of the investments, this is lunch with a very large discount. I realize I’m screaming into the gridlocked, political void, but scream I will. And you should too, IMHO.


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11 comments in reply to "Bond yields are just so damn low…what is that telling us?"

  1. No One of Consequence says:

    No kidding. Why in the world we did not undertake significant, multi-billion dollar infrastructure project is simply beyond me. High speed rail on both coasts, and across the south US and the northern US. Repair roads, bridges, rail, etc. Fiber optic to each and every municipality in the lower 48. Solar investments, wind investments, tide investments, etc.

    Money has been damn near free to borrow for a while now, so why we didn’t see a sale price on bringing out country back up to snuff, I have no idea.

    The Rich do not spend tax cuts. The velocity of those dollars is quickly reduced to damn-near zero. Contrast that with the velocity of the dollars given to the poor and middle class as wages.

    Trickle down is demonstrable BS at this point. We’ve had nearly 40 years or more. Doesn’t work for the Average Joe. Top marginal tax rates should be raised back to Reagan levels. Social Security cap should be eliminated entirely. The person making $110k shouldn’t pay the same as the person making $110 million.

    We put men on the moon and brought them back. We sent a Volkswagen-sized R/C science station to Mars and are still driving it around doing experiments and collecting data. Darpa essentially created the Internet. We can do amazing things as a people and as a country.

    Why don’t we?

    – Zhirem

    • laura says:

      The why not is sadly a no-brainer. In January of 2009, Mitch McConnell and others met and declared an intention to block, undermine and oppose every action of President-elect Obama in the hopes of making him a one-time President.

      Despite the fact of his re-election or the numerous sound arguments in favor of robust investment in infrastructure, one of America’s two political party’s elected officials has no intention of doing anything to legitimize a black Democrat President of these United States.

      That’s why. SASQ.

      • John M. says:

        Unfortunately, President Obama is at least as much to blame. He didn’t propose any of it, although he did propose and get a small fiscal stimulus. Not only didn’t he activate his base to push for things, he opposed those things himself, instead buying into at least a limited version of austerity. He made numerous unforced errors, such as creating the BS Commission.

        In bargaining, he gave away the store before the bargaining began. (Ruling out bargaining tactics before the bargaining began. Okay, maybe the second default time, he did secretly mint one or more trillion-dollar coins.) As Rortybomb pointed out, he lost badly instead of losing well, energizing his base and readying them for more battles.

        As far as infrastructure repair and upgrade, the early years of his term were a massive opportunity he let fly by, probably never to return.

        How much of this was deliberate? I think practically all was.

  2. Tom in MN says:

    I prefer to look at the plot of 10 year Treasury yields since 1980 and they show a steady downward trend. It seems to me we need to get people expecting more inflation and thus wanting more yield on bonds to fix this. Otherwise the Fed’s funds rate gets trapped at zero. I don’t think lots of infrastructure spending (which is very needed I agree) will help this as the Fed will clamp on the brakes as soon as inflation gets near 2% as they have done very well in the past. Thus unless they raise their target for inflation, they will keep cutting off any attempts to get the economy moving again.

    And yes, please keep screaming….

  3. Joe says:

    Great article as per usual. I am in full agreement.

  4. George H. Blackford says:

    The central argument of Keynes’ General Theory is that classical economists put the cart before the horse in assuming that the economic progress is driven by savings. Both Keynesian and non-Keynesian neoclassical economist alike have ignored Keynes’ arguments in this regard (what Robertson dubbed “the long-period of saving) as they created a vision of the economic system that allowed mainstream economists to support the economic policies of the past forty years—lower taxes, less taxes, and deregulation—that led to the Great Recession we face today. It seems quite clear to me that the failure of the profession to understand Keynes’ explanation of this problem lies at the very core of the chaos within the discipline of economics today. See

  5. reed E Hundt says:

    Borrow and invest…means put the borrowed money into something that return the capital and this little bit of interest. The answer is capitalize the green banks our non profit has been creating with various states. It is not to hand out cash to non-income producing road repair. There is no payback from pothole filling. Maybe there should be an Internet based method of having beneficiary vehicles pay for the repair but there isn’t. So as opposed to increasing the federal government deficit, instead just borrow long and pay back long and hold the deficit constant over the decade or so needed for the payback. This takes full advantage of the low rate on public borrowing, moves the country to a clean energy platform and allays any worry about the deficit growing on a long term basis.

    • Mike says:

      May I disagree? Filling potholes provides employment which: limits need for public assistance, increases taxable income and increases travel efficiency while decreasing vehicle maintenance costs for everyone who utilizes that thoroughfare. A $100 “pothole filling” could save $hundreds for every vehicle that has an unfortunate encounter with that pothole – to say nothing of the safety concerns when drivers suddenly swerve in rush hour traffic.

  6. John Van Sant says:

    Be careful, a lot of this is driven by Europe. I could see a “small crash” in US bonds later this year.

  7. Bill A says:

    Our economy is like the ball a blindfolded person is playing on a pin-ball machine.
    Lets KISS.
    If Jamie Dimon were in prison today for the crimes he committed in 2012 it would mean the nation was serious back then about the future good and welfare of society.
    It may not, IMO, be too late to fix that and remove that blindfold.

    • kmiker says:

      Actually, a sincere commitment to “sin no more” would suffice absent the damnation to eternal flames.