One of the most non-consensus trades I can think of right now is that Treasury bond yields will melt down into the low 2% range, or dare I say below it. Inflation and higher yields continue to be the herd’s mantra despite being in a broken financial system, having a banking system that continues to hide losses (evidenced by the suspension of mark-to-market accounting), and a Federal Reserve that has been forced to turn to quantitative easing as a last resort to avoid an all out debt deflation.
It seems like no one believes, or no one wants to believe, that there is even a chance that yields could actually fall below the levels reached at the apex of the 2008 financial crisis. I’m not saying I would lay great odds on it either, but take a look at the chart attached, which shows Japanese 10 year bonds yields. Those yields have been locked under 2% for more than decade. Isn’t there some chance that we could follow suit?
Yes, I know there are differences between Japan and the U.S. There are differences in demographics, and in the way they handled their own crisis from a monetary, fiscal, and currency perspective, and we have Ben Bernanke as our Fed Chairman who just happened to write a paper called “Deflation: Making Sure ‘it’ Doesn’t Happen Here.” I get those arguments, I just don’t get why folks seem so programmed to not look at the similarities between the Japanese bust and the U.S. Great Recession. Too much debt, a housing problem, a busted equity market, and an attempt to cover up bad debts all seem to be a recipe for a prolonged period of subpar economic activity. Below 2% on the 10-year Treasury, nobody believes it could happen, which is precisely why investors should be open to the idea that it could.
