The yield on the 10-Year Treasury note is rapidly approaching a historic low, currently hovering around 1.56 percent. For those relying on income investments, a yield of this nature is almost negligible.
To illustrate, if you invested $1,000 in government bonds at that yield, you would accumulate just $156 over a decade. This translates to a mere $15.60 per year, a rather unappealing proposition.
Furthermore, inflation is poised to diminish the purchasing power of that initial investment. According to the government’s own understated inflation calculator, $1,000 today holds the same value as $842 did in 2006. Therefore, after accounting for inflation, the supposed $156 gain results in an actual loss of $2.
But the erosion of purchasing power isn’t the sole concern. Investing in U.S. Treasuries may present a significant risk for another reason. Michael Hasenstab, manager of the Templeton Global Bond Fund at Franklin Templeton Investments, suggests that investors in U.S. Treasury bonds might experience “a significant capital loss.”
Hasenstab believes that rising inflation could compel the Federal Reserve to increase interest rates more than anticipated. When this occurs, he predicts a substantial devaluation of U.S. Treasury bonds, potentially impacting many American retirees negatively.
Unforeseen Events
Hasenstab presents a compelling argument that resonates with us. In fact, we’ve been anticipating the imminent collapse of the U.S. Treasury bond bubble for the past eight years, if not longer. Yet, against all odds, year after year, our predictions have proven incorrect.
Over this period, an unusual phenomenon has unfolded. The U.S. Treasury bond bubble hasn’t burst; instead, the yield on the 10-Year note has remained afloat, fluctuating between 1.6 and 3 percent.
Intuitively, it feels like the situation for U.S. Treasuries should reach its limit. However, we must ask ourselves—what do we truly know? Yields could plunge further, possibly even into negative territory. Unbelievable events are occurring right before our eyes.
Take the case of German bunds. Just this week, an unprecedented event transpired: for the first time ever, the yield on the 10-year German bund dipped into negative territory.
Reports speculate various reasons behind this unprecedented development, with some attributing it to the upcoming Brexit vote—Britain’s exit from the European Union—and others pointing to weak global growth prospects. Here at Economic Prism, we harbor our own reservations.
Shattered Dreams of Generations
We hold the opinion that credit markets are fundamentally broken. Yields no longer reflect a balanced price for capital dictated by market supply and demand. Instead, they resemble a flat-lined market, akin to an ECG displaying a heart that has stopped beating.
This scenario would be unimaginable in a truly free credit market. Unfortunately, we do not dwell in such a system; instead, we navigate a heavily managed economic environment marked by aggressive central bank intervention.
This mismanagement has led to negative yield government debt offerings and caused countless distortions in the economy, making it challenging to comprehend the full impact. In the absence of genuine price determination, decisions are often misguided.
In essence, those in charge have relentlessly pressed the buttons of credit creation with reckless enthusiasm, effectively damaging the credit market. Yet, they continue their actions unabated.
Recently, Janet Yellen once again pressed these malfunctioning buttons. Following a two-day FOMC meeting, the Fed Chair stated their intention to maintain the federal funds rate at a mere quarter percent—essentially zero. What kind of irrationality is this?
If this trend persists without leading to a complete breakdown, the yield on the 10-Year Treasury note could also dip below zero, along with the hopes and dreams of countless retirees.
Sincerely,
MN Gordon
for Economic Prism
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