Interest rates on U.S. Treasury bonds may never be this low again. Ever.
As Harry points out, we’re still facing another nine to 10 years of slowing growth, debt deleveraging and financial turmoil. Currently, with the yield on 30-yr U.S. Treasury bonds around 3%, investors are NOT getting paid adequately for the risks still present in the global economy.
I say global economy because, despite relative outperformance in the U.S. recently, we’re all in this together. During the next financial crisis, even while the U.S. remains the safe haven of choice, I expect the bond market will revolt and demand much more than today’s measly 3%.
Let’s take a look at what could be a multi-decade bottom in interest rates. Here’s the 30-year U.S. Treasury yield:
The yield on 30-yr bonds first bottomed in 2009 around 2.5%. This was led by a surge in panic-driven bond buying when everyone thought the world was ending. Now we know the world won’t end (sorry Mayans), even if we have a lousy economy to muddle through.
Despite recovering to yields of 4.5% in 2010/11, rates have since tanked again as the Fed became more aggressive with its monetary stimulus and bond buying efforts.
But you’ll see in the chart above that 30-year rates stopped cold at the same 2.5% where they bounced from in 2009. This “double bottom” suggests the bond market won’t accept anything less than 2.5%.
It appears we now have a line in the sand.
When the next wave of financial turmoil hits our shores – there’s no way we’ll be immune to it – I don’t think bond buyers will be fooled again.
Watch for rates to go back above 4% in the next 18 months. Yields in the euro zone will easily be double or triple that.
While the U.S. will still look relatively better, now is NOT the time to buy bonds.
If you haven’t done so already read the Survive & Prosperissue on “Government Stimulus and Low Interest Rates = Massive Debt.”