Treasury Yields Should be at 10% ?

July 13, 2009 8:05 am

Here is something that you do not hear too often. 10% for treasuries are the right yield in the middle of this mess. Hmmm. How does that work? Isn’t the whole point of bringing down yields to help with liquidity and spur on the consumer during a difficult economic downturn? Thoughts?

July 9 (Bloomberg) — Yields on U.S. Treasuries are being artificially suppressed by the Federal Reserve, otherwise bonds would yield more than 10 percent, according to Lee Quaintance and Paul Brodsky of QB Asset Management.

“Macroeconomic fundamentals imply longer-term Treasury yields should be priced above 10 percent,” the strategists wrote in a research report this week. “Investors are being forced to judge asset values in a hall of mirrors.” The CHART OF THE DAY tracks the yields on 10- and 30-year U.S. government debt in the past 14 years, showing that 10 percent yields haven’t been seen since October 1987.

“There are powerful structural forces blocking any fundamental reconciliation of value,” Quaintance and Brodsky wrote. “These forces include bond markets comprised mostly of domestic and foreign investors with incentives that place them at odds with rational credit pricing, as well as central banks with unlimited spending capacity threatening, and being encouraged by all, to intervene when necessary to provide a ceiling on yields.”

Click chart to enlarge


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