Greenspan Predicts Bond Yields Rising As High As 5%

Tyler Durden's picture

While the world has learned to take Alan Greenspan's forecasts with a grain of salt, earlier today the former Fed chairman was on Bloomberg TV with another bombastic prediction, warning of a substantial surge in US long-term interest rates should "inflation take hold." 

In the interview, Greenspan said that “if the early stages of inflation, which are now developing, would take hold, you could get -- fairly soon -- a fairly major shift away from these extraordinarily low yields on 10-year notes, for example,” Greenspan said in an interview on Bloomberg Television on Monday. “I think up in the area of 3 to 4, or 5 percent, eventually. That’s what it’s been historically."

Greenspan emphasized his often-repeated point that such low rates are unsustainable in the longer run, and said that he sees nascent inflation as the possible end to the bond bull market. “We’re moving into the very early stages of inflation acceleration,” Greenspan said. “That could be the trigger.”

To be sure, Greenspan admits that such a substantial rate move will not happen without substantial side-effects, and he warned that challenges lie ahead as longer-term rates adjust upward toward a more historically normal level: "It’s a problem, as in going from where we are now to 4 or 5 percent,” he said. "There’s a whole structure of adjustments which have taken place, basically since 2008, which have to be unwound, and that’s not going to be done without a problem."

The biggest problem, as Greenspan explained in another interview in July, is that surging inflation - on both the short and long end of the curve - would almost certainly lead to stagflation:

Three fourths of the major economies, OEC economies for example, have, over the last five years, have had a less than a one percent annual rate of upward growth. The economy can't go anywhere under those conditions, and we're getting a state of stagnation which is not only evident in the United States but pretty much throughout Europe and the far east. And as a consequence of that, it's very difficult to see where the next step is except what I'm concerned about mostly, is stag-flation, meaning I think we're seeing the very early signs of inflation beginning finally to pick up as the issue of deflation fades.

Since stagflation is traditionally a concurent indicator of recession, Greenspan was then quizzed if he expects a US recession in the next 12-24 months, to which he refused to provide a clear answer:

It's very difficult to say.  In fact, I don't think you can describe the world economies in terms of the old conventional issue of inflation, recession, and the like.  What we are dealing with is a population that is aging very rapidly, and that is inducing a major increase in so-called social benefits, what we in the United States call entitlements.  And that is dominating the whole financial system, and until we come to understand that we have got to slow this rate of growth, which in the United States has been 9% per year since 1965, we are now down to the point where it's taken so much savings out of the economy that we're not getting enough investment, but that has very little to do with whether we're going in a recession or not.  I think we're just in a stagnation state.

While Greenspan may well be right in his assessment, one area where we clearly disagree is his take on rising wages, which is also a prevalent sentiment among the investing community. Back in July Greenspans said that "we're beginning to get a pickup in wages beyond the rate of growth of productivity, and that is usually the best indicator."

Actually that is incorrect: as we showed on Friday, the one place were wages are rising, and are doing so at a record pace, is in pay for managerial, supervisory workers, those who are already highly-paid, and where the marginal change in wages does not result in a substantial impact on the economy.

At the same time, wages of non-supervisory, production workers have been largely unchanged over the past two years, and when adjusted for core inflation, have barely experienced any growth.

And then there is the question of just how a 5% interest rate across total US debt would be internalized: as the following chart from Bridgewater shows, a 5% rate across the hundreds of trillions in total US obligations would lead to nothing short of a massive shock to the sytem.

In any event, a modest move may have started already, with 10Y yields rising today to 1.82%, back to a five-month high after the Federal Bureau of Investigation reaffirmed that Democratic candidate Hillary Clinton didn’t commit a crime in handling her e-mails as secretary of state, a move of such a magnitude would involve trillions in mark-to-market losses as both Ray Dalio and Goldman warned recently.

In the interview Greenspan also said that he would like to repeal the Dodd-Frank Act, the post-crisis financial regulation measure that he said is reducing liquidity in the financial system, and replace it with a large equity-to-asset ratio requirement for financial intermediaries, according to Bloomberg. “I would very much like to go back to square one, repeal Dodd-Frank,” Greenspan said, adding that he’s “thinking of 20 to 30 percent capital requirements.”

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clade7's picture

Would somebody please stuff a head of lettuce in this old tortoises mouth? Preferable, on the end of a Mossberg?

Il Dottore's picture
Il Dottore (not verified) froze25 Nov 7, 2016 12:24 PM

So I guess that he knows that Hillary is going to win. Fuck this shit. Putin, nuke us quickly and end with this shit.

froze25's picture

No one knows jack, get out and vote Trump. Its not over till its over. Force those shit bags to steal by criminal means that are obvious. Trump 2016

nope-1004's picture

I trust what a banker says.



Bernocchio said "never normalize in my lifetime", so I think Greenspan is intentionally lying to try to limit Treasury redemptions.

JRobby's picture

He is out of the loop.

Better issue zero coupons if Al's prediction comes true.

Holy hand grenade of Antioch's picture
Holy hand grenade of Antioch (not verified) JRobby Nov 7, 2016 1:16 PM

Mr. fucking Magoo

MalteseFalcon's picture

Greenspan:  "I will go out on a limb and predict that at some point in the future, the interest rate will rise to its long term average.  That will be $250,000.  Thank you."

Davy Crockett's picture

National Debt= $19.8T

Current Federal Budget at 0% interest = $3.999 Trillion

Debt Service (what tax payers pay to service our debt)

  • 1% Interest => $198 Billion  => New Fed Budget = $4.198 Trillion = 5% tax hike to pay interest
  • 2% Interest => $396 Billion  => New Fed Budget = $4.396 Trillion = 10% tax hike to pay interest
  • 3% Interest => $594 Billion  => New Fed Budget = $4.594 Trillion = 15% tax hike to pay interest
  • 4% Interest => $792 Billion  => New Fed Budget = $4.792 Trillion = 20% tax hike to pay interest
  • 5% Interest => $0.99 Trillion  => New Fed Budget = $4.99 Trillion = 25% tax hike to pay interest
1777's picture

Great post! Just whip out the maff.

Let's see.....chunckchunck.....tappitytap.....and OH of it is!


What an idiot forecast, he darn well KNOWS a QUARTER % rise in rates is about 60 BILLION DOLLARS!

Don't you wish they would just SHUT UP at this point!?

Nation of Imbeciles's picture

You're pretty much spot on. At the end of FY16, the Treasury paid out a total of $432,649,652,901.12 in Interest on the National Debt. See link for multi-year chart below. Likewise,the average interest rate on all outstanding debt as of 16 OCT 2016 is roughly 2.16%. See 2nd link to chart below. As a result, the US has paid out well more than $10 trillion dollars in interest on the national debt since FY'88 & the principal was NEVER REDUCED since the USA treats its debt as an interest-only loan.

One can only wonder if negative rates are only attractive to the burons who would use it as an opportunity to go on another spending spree ay our expense.

*Interest Expense on the Debt Outstanding:

*Interest Expense and Average Interest Rate Graph

SoDamnMad's picture

Holy shit.  What a resemblence.  Quick, call Interpol and put out a warrant for questioning on where they were at the time Madeleine disappeared.

Waterboard them if necessary. 

Larry Dallas's picture

This guy is now speaking plain English?


When he was Head of the Fed, he was talking all sorts of Frasier Crane-esque bullshit that no one could understand.


Die already.

ThirteenthFloor's picture

Or pop Mr. Magoo's head with a needle.

onwisconsinbadger's picture

3 to 4 or 5 ? WTF. This man should be in jail.

KnuckleDragger-X's picture

Five percent yields on twenty percent inflation.....

Manthong's picture

It can happen, I suppose.


KnuckleDragger-X's picture

I remember the Carter years and why they changed how inflation was calculated, and why they did it......

CrimsonAvenger's picture

He should be dead, he's older than God's babysitter. Why do evil people live forever?

seek's picture

A pocket calculator and the current US Debt will tell you that's never going to happen.

tarsubil's picture

Maybe they are so stupid that they truly believe that the debt doesn't matter?

aliki's picture

do it

1. give pensions & insurance companies a chance to exist

2. take down to 10,000

3. cut artificial real estate prices in 1/2

4. allow u.s. citizens to retire before 100

everybody wins, right?

pitz's picture

Banks, pensions, and insurance companies have done fabulously with the low rate environment.  This move would kill them.

GUS100CORRINA's picture


Philo Beddoe's picture

I think Al forget to take his daily dose of breastmilk and sperm. 

Bam_Man's picture


Could somebody please tell me what would happen to House prices if mortgage rates were to DOUBLE from here?

Thank you.

And also please tell me what happens when almost EVERYBODY in this country with a mortgage finds themselves 25%-50% under-water?

I can assure you that it won't be "inflation".

clade7's picture

Well that depends.....are you buying or selling?   Heres my me, I'm a real a tore...I live in an RV if thats any condolence, no massive overhead like the biggies..and by RV I mean a 2001 Corolla...

Caleb Abell's picture

"...I live in an RV if thats any condolence..and by RV I mean a 2001 Corolla..."

I don't believe you.  If you were an actual realtor, you would have described your Corolla as a "Cozy" RV.

joego1's picture

Greenspan just broke everything.

BrigstockBoy's picture

How does Alan feel about gold today? Economic freedom as he stated in 1966? Another sell out to the globalist agenda.

DirtySanchez's picture

I predict that old jew will shortly go as low as 6 feet under.

Seasmoke's picture

Much much lower than that.

pitz's picture

Talk about armaggedon for the insurers, banks, and pension funds if their long-term bond portfolios melt down enough for 5% long-term rates to be reality.

We're looking at what, 50% losses on 30-year paper here?

2ndamendment's picture

Insurers actually benefit greatly from higher interest rates, especially those with longer term liabilities, such as a life insurer. It takes time for old assets to roll over, but it would help. The only time it would hurt them is if the rates moved higher really quickly thus causing them to write down bond investments. But if it moves gradually, it helps their income statements tremendously. 


Remember they have to invest the premiums policyholders pay them in order to pay out future claims. 

pitz's picture

Have to disagree here.  The insurers have invested based on bond portfolios returning their coupon rates at the time of investment.  The falling long-term rate environment has allowed bonds to deliver far more than their coupon as a return, simply by rolling over bonds prior to maturity and keeping durations long.  When rates rise (or stop falling), this no longer works, and such a strategy actually delivers beneath coupon returns.

Insurance, pension funds, banks, are some of the wealthiest entities on Earth because of this math, and when it goes into reverse through rising rates, they're going to experience a world of hurt.  Sure, the liabilities might be debased, but the returns will be debased even more dramatically.   Also, with collapsing asset values, there will be simply be far less value to write insurance against.  If houses lose 50% of their value, for instance, people will need only 50% of the insurance on them to protect against loss.  Similar deal with life insurance, which is usually purchased to protect against loss of income due to death.  Rising rates/falling asset values are basically "kryptonite" to the FIRE sector including insurers.

LawsofPhysics's picture

in laymans terms, the ponzi fails.

pitz's picture

Yeah the insurers will blame low rates for their problems.  They'll blame high rates for their problems.  Nobody wants to address the whole idea that the pensions/insurers are promising more than the economy mathematically can deliver for returns.  Meanwhile compensation at the insurers is right over the top, with the execs basically looting most insurers dry.  Hardly the traits of an industry which some claim is in dire straits (usually such industries have intense cost control!).

Insurance has kept up with the S&P500 quite nicely over the years, so its also nonsense to claim that insurers haven't done well with falling rates. 

LawsofPhysics's picture

Correct.  Come hell or high water capital and real assets MUST BE RESPECTED!!!

NIRP/ZIRP essentially says that there is "no risk"...

Fuck me.  bankers and financiers continue to have access to all the free money they want. They then buy all the assets of the REAL PRODUCERS FOR NOTHING and face NO REAL RISK!!!!

No matter, such "let the majority eat cake" monetary experiments have in fact been tried before.  If these fucker want to slit their own throats, I say we should let them.

pitz's picture

They face risk -- risk that the people who actually make the economy work, get fed up.  Is it any wonder why "they" have tried to replace every STEM worker of any significance in the nation with H-1Bs and foreign guest workers instead?  More malleable, more pliable.  Won't complain if paid peanuts.  This is why getting the Trump elected is so important to the nation.  The strangehold of big finance over the nation must be broken. 

cheech_wizard's picture

Deaths usually come in 3's when it comes to celebrities... does this rule apply to the political class? 

Standard Disclaimer: Janet Reno, ___________, _____________...


Yukon Cornholius's picture

Putin, Assad? How would the people feel about that?

UnschooledAustrianEconomist's picture

Soros Sr.

Soros Jr.

Fixed it for you.

Uzda Farce's picture

Soros Sr., Soros Jr., Volcker, Cheney, Greenspan, Summers and Rubin are members of the Rockefeller/CFR along with Bill Clinton, Ashton Carter, Jacob Lew, Janet Yellen, and Lloyd Blankfein. Also every Fed chairman since WW2. See member lists at cfr dot org.

Francis Marx's picture

The guy never had anything right

AllTimeWhys's picture

doesn't look a day over 'die already'