US Gov't Bonds Yield More Than Developed Countries For 1st Time in Two Decades

US Treasury yields are rip-roaring vs other developed countries. The bet is on inflation.

Which is it: Faster growth or higher inflation?

Analysts said the rise in yields in part reflects optimism about the U.S. economy and expectations for a pickup in inflation, which threatens the value of government bonds by eroding the purchasing power of their fixed payments. A market-based measure of expectations for annual inflation over the next 10 years, known as the break-even rate, recently reached its highest levels since 2014.

“The U.S. has the highest rates of everyone in the G-10 and it looks like the rate differential will continue to widen,” said Chris Gaffney, president of EverBank World Markets. “The U.S. seems to be going it alone in this rising interest-rate path.”

At the same time, economic data throughout much of the world has failed to meet expectations, eroding support for bets that the euro, yen and other currencies would rise versus the dollar. While investors speculate about the Fed increasing its pace of monetary tightening, they have also reduced their expectations for tighter monetary policies in Australia, Canada, the U.K., Japan, the euro-zone and other economies.

Higher Treasury yields are pushing investors back to the dollar, after they crowded into bets that the euro would rise versus the U.S. currency. As economic data has weakened in Europe, pushing yields down even as monetary policy remains accommodative, signs of employment and inflation growth U.S. have persisted, lifting Treasury yields higher. That shift has squeezed some investors, leading many to exit the trade.

Investors say they are also looking at the yield differential because the gap has made it increasingly expensive for money managers in Europe and Asia to buy U.S. government and corporate bonds. Those investors are increasingly looking instead to buy debt in Europe, where hedging costs are not a problem. This dynamic could make borrowing more expensive for U.S. consumers and businesses, and act as a check on growth.

2007 Decoupling Theory in Reverse

This reminds me of the widespread decoupling theory of 2007, except in reverse.

The idea then was the US was headed for the gutter and the rest of the world was about to lift off, led by China.

Today, analysts have latched on to the equally preposterous idea that the US can avoid a slowdown in China, Europe, and the the rest of the world.

Get a Grip on Reality!

Mike "Mish" Shedlock

No. 1-17

"Gentlemen prefer stocks". The idea that funds must go "somewhere" when they leave a certain locale in the financial markets is a common mis-conception and one that leads people to arrive at conclusions like yours -- the financial media makes this mistake all the time. The reality is that most of the 'funds looking for a home' that you refer to are not real savings -- they have been borrowed into existence -- which means, in a crisis, they actually start to disappear (from whence they came). It's commonly known as deleveraging. As a VERY rough idea, money substitutes represent around 80% of the overall money supply, the point being that scope for deleveraging is pretty substantial. Between you and me that is not positive for ANY risk assets, except perhaps gold which typically outperforms as the gold market anticipates central bank money pumping to 'fill' the deleveraging gap.


I know there's already a pile on El_Tedo, but it's a simple concept that between our many trillions of public debt and massive household debt, normalizing interest rates (say 5-6%) would make servicing all that debt unbearable.

We have intentionally created a series of enormous bubbles with easy money and at some point we must pay the piper. How this situation translates into "the economy is improving" is anyone's guess.


It looks to me like this is a credit fueled expansion cycle similar to and bigger than the prior recent cycles. Anyone can give credit away such that borrowers will bid up asset prices with other people’s money in the short term. The problem is the policy is not stable. The Fed’s latest theory appears to be, if they tighten s-l-o-w-l-y enough, then the economy will have time to adjust to increasing credit costs without excess leverage and mal-investment causing an uncontrolled credit collapse. Looking at a charted history of Fed tightening cycles, they are running this one up roughly half as fast.

Maybe it will work, but I doubt it. The reason I doubt it is, for the Fed to be successful, underlying cash flows must increase on a percentage basis at least as quickly as the Fed tightens. From December 2015 to March 2018, the Fed increased the Federal Funds Rate from 0.25% to 1.75% and prime rate increased from 3.25% to 4.75% (prime rate increased 46%). Did cash flows on financed projects improve 50% during the last 30 months? Will cash flows have improved to 160% of 2016 levels after the Fed hikes two more times this year? I expect not. Then there is the issue of people doing cash-out refi’s to support their lifestyle as housing prices enter a credit fueled bubble. That credit was consumed. It is gone.

Want a padded prediction about when the wheels come off? The Fed’s last hike in the prior cycle was June, 2006. Houses stopped selling that summer (I remember because I sold my house one month before everything stopped). I expect something similar this time. Certain segments of the economy will be looking spongy when the Fed stops hiking. Problems will be apparent to everyone 24-30 months after that. Until then, it is a game of musical chairs.


It's all relative. The rest of the world is worse off, so where else does the $80 trillion in global investment park for safety, especially when the govt bond bubble is close to popping? This size does not park in gold or under a mattress. As the public to private transition picks up speed with the collapse of socialism, the new saying will be "gentlemen prefer stocks".