Bond Bubble, Or Rational Expectations? Visualizing 220 Years Of Treasury Yields

Tyler Durden's picture

Near multi-generational low bond yields, driven at least in part (and some think in full) by the undeniably large asset purchase program (Quantitative Easing (QE)) that the US Federal Reserve has been implementing in one form or another since the 2008 Global Financial Crisis (GFC), have pushed the question of whether or not the bond market is a bubble to the front of many people's minds. However, while the chart below of over 220 years of 10-year treasury yields shows the extraordinarily low bonds yields, they have resulted from many fundamental and rational drivers (expectations of weak economic growth and safe haven flows amid the European sovereign debt crisis) in addition to Fed purchases. So while bond prices look expensive, there is nothing particularly bubbly about the bond market today.


(click image for huge version)


Source: Goldman Sachs

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markmotive's picture

Unless you think 1) real growth will return or 2) the bond vigilantes will skip Japan and visit America we could see low rates until 2027, if we tracked Japan.

zorba THE GREEK's picture

After reviewing the chart, it seems obvious that things got out of control in the 70's

when Nixon took us off the gold standard. 

willwork4food's picture

In the EARLY 70's. Then we got Fleetwood Mac, Blue Oyster Cult, Pink Floyd and things took off again.

That is until everyone ignored the best music of ages...then the shit hit the fan.

Gold, smold, who needs pms when you can rock to Van Halen?

Abraxas's picture

So, I guess we are financially wiser because no sane person could listen to Justin Bieber or Lady Gaga.

kliguy38's picture

Don't worry about it......Fema camps have re education prepared for gold AND classic rock lovers......when you come out you'll be given a Justin Beiber tatoo and free Prozac

Abraxas's picture

Deep Purple with pot replaced with Justin with Prozac. That's it, I can't take it any longer. Where's that rope?

willwork4food's picture

It burned up in the gambling house...

Jekyll_n_Hyde_Island's picture

Pretty sure the reptilian sarc of McMolotov, the Hedgeless horseman et, al finally saturated one of the Durdens.  I'm wondering if I have a bottle of wine and two vikodin this chart will make sense stacking with other economic factors.

algol_dog's picture

Think you forgot to include "Sly and the Family Stone" in there ....

Aaron Burr's picture

I want to, want to, want to take you HIGHERRRRR!

DeadFred's picture

With all due respect Van Halen is undanceable. And with additional due respect Lady Gaga, despite being the nadir of humanity, has extremely versatile dance music. Bad Romance is a terrible song lyrics-wise but a great cha cha.

willwork4food's picture

Dance the night away!! See me dance when I win the Mega one of these days..

Actually the only one he made I really like!

Jack Napier's picture

Any funk from the 70's would be preferable to today's music as far as dancing goes. The 80's had plenty of good stuff too. No need to resort to tools who don't write their own music.

Its Only Rock N Roll's picture

The one band that has endured the full rate cycle?  Going on tour next month.....ladies and gentleman ....The Rolling Stones



Pareto's picture

Rush has been around for over 40 years.

RebelDevil's picture

At least we have Radiohead, Muse, and Coldplay in the current era. Sucks for the sheeple who buy shit music.

andrewp111's picture

I disagree. The runup in interest rates from 1949 to 1981 is kind of symmetric with the decline from 1981 to present. Each side is the same amount of time - 32 years! This shows the Nixon end of the gold standard to be a consequence of the rise in intererst rates, not the cause.

Stuck on Zero's picture

A chart to go along with this one would be real yield after true core inflation.


Jekyll_n_Hyde_Island's picture

Andrew: good single-leg takedown of post hoc ergo propter hoc reasoning.

Nostradamus's picture

You don't think this could be a game changer in the way the world views Japan versus the U.S.?

Dingleberry's picture

"Bond vigilante" does not apply to major economies like US, Japan, etc. That was all a myth.

"PM vigilante" does.  Superimpose a gold/silver chart over the bond one. You'll see. 

That's why PM prices were and are suppressed, primarily with naked shorting but other ways too. Ask the Hunt brothers and read what Volker did. 

We are supposed to believe that we have a recovering economy and bond rates are negative, even with cooked inflation numbers?


JeffB's picture

1. I don't think real growth will return with the government induced misallocation of resources.

2. I think the bond vigilantes have already visited America to a large extent, but that has been largely offset by monetizing of the debt by the Fed and purchases by a number of other countries, some of whom are insolvent themselves... Japan buying hundreds of billions of our debt when their own debt is over 200% of GDP?

3. Our own "official" public debt is dwarfed by the "unfunded liabilities" of Social Security, Medicare & the Medicare Drug Program.

The outcome of the tightrope balancing act pitting the inflationary effects of "money printing" vs the deflationary impact of bad debts being written off (or not) is what will determine where the interest rates on the Treasuries will end up. So far Japan has erred on the side of deflation, but now seems determined to push for higher inflation. Will we do the same? If inflation takes off it may be very hard to stem the tide of what could be an avalanche.

In any event, holding long bonds seems a very risky move. Investors in European bonds of insolvent countries are finding the risk was far higher than the minimal interest rates would indicate. Given that if we count the unfunded liablities in the U.S. that the total liabilities already exceed $1.2 million per taxpayer and rising rapidly, I see no reason to think that long term U.S. bonds with a few percentage points of interest is a reasonable purchase, even if there is a possiblity that a continuing or worsening horrible economy and central banks purchasing them hand over fist in a last ditch struggle to keep from drowning, might keep interest rates abnormally low, or even push them lower, for a while longer.

WhiteNight123129's picture

Common mistake, stagflation has nothing to do with real growth, actually you can have stagflation with negative real growth. Check Argentina. But the Gov managed to delveraged since 2002 (inflate away).

howenlink's picture

Gold, James Gold.

markmotive's picture

Whoever wrote the sources on the graph needs to check his source names again.

Urban Redneck's picture

Whoever wrote that BS for GS- that bonds aren't in a bubble need to check with an actual bond trader on the impact to bond prices of absolute interest rate movements towards mean reversion relative to current pricing.


Sort of like those math geniuses at Blackrock who forgot to do something similar when modeling securities prices and repayment risk for sub-prime mortgage based derivatives a decade ago (it's just a bit more complex than Black/Scholes in the real world), not that a fink like Fink would be able to grasp such a concept though...

topspinslicer's picture

When you are high on the big brother crack pipe everything looks like a bubble at the same time that it looks like it aint. That big gov crack is poison funny like that

fonzannoon's picture

How about overlaying that chart with the national debt?

Is this really a ZH article? Am I losing my mind. Now ZH has the S&P reality above 1400 and treasuries are fairly valued at these levels?


kito's picture

remember fonz, the completely manipulated bond market is a bargain compared to the completely manipulated stock market...oh wait...i thought it was the other way around........................shit im so confused...............

fonzannoon's picture

This article knocked me off balance.


kito's picture

im thinking its the beer that took you down..................

fonzannoon's picture

Nah it's wine. I just hpe ZH did not get Egan Jonesed.

kito's picture

merlot, malbec, cab???????????

fonzannoon's picture

Apparently it's a shiraz type Cab/bath saltz.

I am going to stick with funny from here. My mind is blown and I like this place, I hope It's just me,

(fumbling around, desperately looking for red pill)


disabledvet's picture

definitely counter-intuitive "in extremis." however i think this is the MOST critical point...namely "it's not the QE but what you do with it" that matters. if QE was used to do anything other than "increase deficit spending to beyond imagination" then i don't think we'd have the low rates we do. in other words all the debt creation by the Government is KILLING economic growth...thus leading to a DEFLATION. the Fed could end the program of course...but obviously "the Government want's to know what .25% interest on the 30 year feels like first." needless to say "this is forcing good behavior on all the various States"...and every other Government in the world the simple question of "what does America make?" becomes "what doesn't America make...and a price WAY lower than you..." i don't know if i like this "QE thing" actually...but for the exact opposite reason as i presupposed (inflationary, dollar annihilating, an immediacy to State bankruptcy) but for a reason i could never have imagined only a year ago...namely "too much of a good thing" (zero percent financing of Government) "leads to only the creation of a bad thing" (unpayable debt, replacement of all benefit checks with an interest rate expenditure, capital "depreciation" on steroids, the loss of final demand, Absolute Power now concentrated in the few Banks that have survived The Collapse...a suddenly emergent and diffuse media reality and all that entails, public works projects "beyond imagination" as well) it's really not a reality i ever envisioned...and towards which i still find myself trying to "adjust" (mentally) to. this is the best i can do for now:

kito's picture

@dv---do the va hospitals treat you well????????????????????

HardAssets's picture

If interest rates go up, it will be obvious that the government (and more importantly to the NWO) the big TBTF banks are bust.

Interest rates often rise in an improving economy.

So, it is against the interests of govt/big banks (the fascist partnership) for the real economy to improve in the U.S.

They will continue to print money and try to expand their Nazi police state to keep a lid on the unrest that they are causing the citizenry - who they consider only to be 'milk cows'.

disabledvet's picture

is this true? "the data speaks to something otherwise" if not completely opposite. i do understand "trying to understand the idea of trillion dollar deficits making money more dear" is a rather "inverse of perceived reality" thing. but we shouldn't confuse the idea of "that cannot possibly be true" with the fact that it is...nor even more importantly "in trying to find an explanation" we simply aren't coming to terms with "the way forward here." wait 'till we get to the "keeping up with the Jones'" scenario.

Jim in MN's picture

Whichever Tyler put this up like this is obviously wasted.  So, you know, sometimes you hang a strip of wallpaper upside down.  Or say throw a Nazi salute in a kind of fascist brain fart.  Ooops. 

Big Ben's picture

So let me get this straight. Interest rates are lower than at any time during the last 220 years, but there is no bubble?

andrewp111's picture

Maybe Federal Government debt isn't a bubble, since the Government can always print the dollars needed to pay the debt back. But junk bonds of companies that are on the edge of default going at under 6% is a bubble.

tmosley's picture

>Goldman Sachs


fonzannoon's picture

Hey ZH if bonds are safe here...why should I be buying gold????? At least bonds would pay me interest!


HulkHogan's picture

You should be buying bonds. Why not, 1% is better than getting wiped out holding shiny chunks of metal.


fonzannoon's picture

I am guessing you pawned your chanpionship belt?

kito's picture

fonz are you typing from your smartphone or are you drunk?????

fonzannoon's picture

a little of both.

 You don't hear me yelling about comma's so let me spell like the putz I am. What is going on here tonight? Bonds are not in a bubble? Is it me or is this an about face?

(I personally thought the belt comment was funny despite the spelling)

kito's picture

dont worry about bonds fonz........the rest of the world is focused on will and jayden smith---:

Go Tribe's picture

What, there's a new Thor movie coming out??? How'd I miss that.