Treasury Yields At Record Lows — TIPS Yield close to negative 1% — Deflation is Priced in

The treasury yields are at all time low with the 10 Y bond hitting a yield of 2.00%. TIPS (inflation protected securities) yielded - 0.9%. Yes, that's right, -0.9% as negative -0.9% as you have to pay to own those securities, and won't receive all your money back at maturity. Negative yields on TIPS are showing that the inflation rate will be negative, meaning that it's not inflation but deflation that we are currently facing.

I wonder how much time it will take for hyper-inflationist to realize that we are on the same path as Japan, and not Weimar — for many obvious reason which they will not admit. To see where we are headed, you do not need a crystal ball, what you need is a history book of Japan, from 1989 to today.

Here are a few quotes from a Bloomberg report published before the major drop in the yield:
Treasuries rose for a third day, putting U.S. government debt on pace for the best monthly returns since December 2008, as investors seek a refuge in the world’s safest securities on concern global growth is slowing. 
Yields on benchmark 10-year notes were within six basis points of the record low reached Aug. 9, the day the Federal Reserve said it would keep borrowing costs unchanged until at least mid-2013. Treasuries have returned 1.8 percent since Standard & Poor’s lowered the U.S. credit rating for the first time on Aug. 5 and are up 2.9 percent this month. A Bank of America Merrill Lynch’s Global Government Bond Index that excludes the U.S. has increased 1.7 percent in August. 
[...] Ten-year note yields dropped eight basis points, or 0.08 percentage point, to 2.09 percent at 9:04 a.m. in New York, according to Bloomberg Bond Trader prices. The 2.125 percent securities due in August 2021 rose 22/32, or $6.88 per $1,000 face amount, to 100 10/32. Yields on 30-year bonds fell nine basis points to 3.48 percent, while five-year note yields dropped six basis points to 0.86 percent. 
Two-year notes yield 0.18 percent.[...] “Long-term inflation is the main driver of interest rates and that doesn’t exist right now,” Camp said. The difference in yields between 10-year Treasuries and U.S. inflation-indexed securities fell to as low as 2.10 percent today, the least since December. The break-even rate reflects investor expectations for inflation during the next decade.
[...] U.S. five-year TIPS yielded negative 0.90 percent before today’s sale, compared with negative 0.18 percent at the auction of the securities on April 21. Investors bid for 2.57 times the amount of debt offered almost four months ago, versus the average of 2.61 for the past 10 auctions. Indirect bidders, the investor class that includes foreign central banks, bought 39.5 percent, versus the 10-sale average of 35.5 percent. 
Treasuries have returned 7.3 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Japan’s government bonds have gained 1.1 percent, while German bunds have returned 5.1 percent, the indexes show.


Tiho said...

"Meaning that it's not inflation but deflation that we are currently facing."

How did you get that?

I will try and help you one last time.

I would have thought that you need all the asset classes to confirm a certain outcome, for it to be true. In 2008, we had a deflationary crash. All main asset classes confirmed this. Yields fell to records back than, commodities crashed, so did stocks and the US Dollar spiked.

Currently bonds are the only asset class thinking it's deflation. Stocks are still above 1040 and no where near March 09 lows. Commodities have fallen even less than stocks and nowhere near late 08 lows. Brent Crude is at $110 for god sake. And the US Dollar has failed to rally during risk off mode.

If the bond market priced in deflation, why isn't there demand reduction for Oil? Shouldn't Oil be at $50 or $30 like you were forecasting a year ago? Man that doesn't make sense... how can we have deflation with $110 Oil? You are not making sense.

It seems that the bond traders are just imagining that it's a repeat of 2008. This is a bond bubble, not deflation. Bonds are a short of a century here with 99% bulls on DSI on them right now. If we were going to have deflationary collapse and demand distraction, wouldn't Copper and Oil be trading at $0? Wouldn't stock be discounting very bad earnings? If so, why are we down only 15%?

You seem to be thinking like 99% of other bond traders. And apparently that's contrarian?

In 2008 bonds were right in pricing in a crash, because all other major asset classes confirmed it. This is not 2008, and no other major asset class confirms US treasury yields making new lows. Emerging markets are not below 08 lows, neither are developed markets, neither are commodities like Copper or Crude. why is the US Dllar not higher than March 09?

I'm not sure where you studied economics, but I got taught that commodities or raw materials are inflation. Commodities need to collapse to see deflation, just like 2008. Where is the commodity crash? Deflation reduces demand...so why is Copper at $4? It's not deflation, that we are experiencing, it's just a correction in a commodity bull market and another opportunity to buy.

Why the fuck would I buy a Treasury bubble right now at 2% yield when I can buy McDonlands yielding more. US government is bust, and even Apple has more money on it's books. The only way those clowns are going to pay back the interest on that debt is by printing money. Printing money is deflation. Printing money will make Copper and Oil explode even higher!

We are all a product of our recent experiences and it looks like 2008 has left a strong impression on you. You cannot seem to remove yourself from the fact that this is not the repeat of 2008. You are reacting just like US Consumer, which are more pessimistic than in 08 according to Uni of Michigan. Calling for a bust is not contrarian. The whole of the US according to Consumer Confidence feels like you. That's not contrarian.

It also reminds of retail investors who are panicking that this is 2008 again, and withdrawing more money out of mutual funds, than any other week, at the rate of record $30 billion is week. We are approaching a bottom over the coming weeks or a month or so period, that should price is this slowdown and send the market into a rally mode! Commodities will explode soon because Bernanke will print money.

Than it will be obvious that both the bond market, as well as your deflation blog thesis will both be a huge bubble with an egg on their faces!

This is total non-sense. I'm out!

pej said...

It all depends by what we mean when we use the word deflation.

To me, deflation, in the austrian economics sense of the term, means "decrease of the total quantity of money and credit".

To you, it seems to mean "general decrease of price".

Real estate being the most expense item and the one generating the biggest debt for a household, is a major source of deflation at the moment, where the bubbles have popped of course.

Moreover, salaries are not rising in the US, nor in Europe. Australia's credit and real estate bubble will pop in time, if it's not already popped.

We can have deflation with oil at $110 if you consider that oil peaked at $147.

Read about Japan, look at their JGBs. They have been trading at a yield of close to 0 for what looks like eternity now. Don't get me wrong, I believe Japan will collapse in the next 2-4 years. But it took them 15 years to get there. So there might be enough time to drive you insolvent if you decide to bet a long term decline of the US treasuries.

Anyway. It's fairly easy to debunk your arguments.

Tiho said...

Well... months onwards we still go no deflation....

Hahaha only inflation and more money printing talk!

pej said...

How about reassessing that statement, one month later?