- by New Deal democrat
The bond market is sending the T—-p Administration, and the US government as a whole, a message. It believes the US is in a secular inflationary trend.
This is not only because T—-p’s tariffs, and his boneheaded war with Iran, are inflationary, but also because last year’s Big Budget Bust-out Bill which doles out $trillions to billionaires, the attempt this year to vote more $Billions to ICE, and even T—-p’s personal raid on the Treasury yesterday, all are gradually moving the US closer towards an unsustainable fiscal situation.
To wit, yesterday yields on the 30 year US Treasury bond (dark blue) made a new nearly-20 year high, at 5.14%. The 10 year Treasury (light blue) also broke out to the upside, with a yield of 4.59%, which is not quite at the peak of its post-pandemic range, but close. Even the 2 year Treasury (orange) made a new one year high. The below graph also shows the 3 month Treasury (gold) and the Fed funds rate (red), all over the past four years beginning with when the Fed started to raise rates:
What is noteworthy over this time scale is that, with the exception of the 3 month duration, none of the longer maturities declined in yield over the past nine month, even as the Fed lowered interest rates.
And since the start of the war with Iran, all of the longer maturities have increased in yield by about .5%, as shown in the below close-up of this year:
The same dynamic has caused mortgage interest rates to rise to a new nine month high as well, which will not help the already recessionary housing market:
The emerging economic dynamic, to paraphrase Mark Twain, won’t repeat the inflationary 1960s-70s, but it likely will rhyme. Showing how that is likely is a little difficult with graphs, but bear with me.
Here are two graphs, of the 1960s and 1970s, showing (1) the increase, in percent, of the 10 year US Treasury (*10 for scale), in blue. If in a given quarter the average yield increased 0.5%, that is shown as +5% in the graph. Also in the graphs are the nominal (gold) and real (red) quarterly percentage change in GDP:
Here is what I want to direct your attention to. Inflation and the secular increase in interest rates began to take off in the mid-1960s with LBJ’s “guns and butter” stimulative economic policy. Thereafter, as interest rates and inflation both increased in any given quarter, in real terms growth in GDP was likely to decelerate or even decline. Thus, for example, in the fist part of the 1960s real GDP growth averaged about 2% annualized, but after the middle of the decade tailed off to about 1% annualized with the exception of the first two quarters of 1968. Similarly, in the 1970s real GDP growth approached 0% in most quarters where there was a significant increase in bond yields.
I expect a similar secular dynamic is beginning to take hold now. And it will likely last throughout the next decade or so. On a long term basis, bond yields tend to follow a cycle which lasts approximately one average human lifetime (i.e., polities are most likely to forget the historical lessons and repeat the same historical mistakes that they have not lived through). In the case of the US, there was a cycle that began with an interest rate peak coincident with with Civil War and lasted until 1920:
Then there was a second cycle that began in 1920 and ended in about 1981:
And we are currently living through the next cycle, that began in 1982 and made its trough in the last decade:
As I’ve noted elsewhere, the Founders’ generation, like the political theorists of earlier times, worried that in a democracy the masses would likely simply vote themselves money out of the Treasury. What they did not foresee was that the very wealthy would put together a victorious coalition and then vote *them*-selves money out of the Treasury.
I cannot say what will happen with bond yields in the next day, month, or year. But the evidence is clear and convincing that an inflationary secular trend of rising interest rates is here.
