Ten-year treasuries are yielding about 3.15% now, that is a significant increase from a yield of just over 2% in December. I for one, thought that Treasuries were in a bubble at 2% (See my post, “Treasurys are in a bubble” from December 08). The thing is I also thought the economy was so weak and the Fed so manipulative that the bubble would get even worse. Bad call. Of course, that didn’t happen.
Not that I was long Treasurys. It is better to have owned TIPS as a hedge against inflation, I argued in early January. And this is exactly what we have seen. A lot of analysts missed the big news in the GDP data yesterday. So let me reiterate my sentiments from yesterday here. It’s called inflation.
Nominal GDP. Nominal GDP itself decreased at a 3.5% annualized rate versus Q4. This compares to a 5.8% decrease in Q4 2008 over Q3 2008. Translation: the nominal slowdown was much less in Q1 than Q4 2008. The similarity in Q4 2008 and Q1 2009 real GDP data is explained wholly by changes in the GDP Deflator (there was a huge increase in the price index for non-durable goods in Q1).
So, my question is this. Are treasury yields rising because of:
- A reflation play i.e. inflation is coming?
- A recovery play i.e. we are seeing green shoots and that’s bearish for Treasurys?
- A Fed play i.e. Bernanke is not going to do any more quantitative easing, or at least not enough to stop rates from rising?
- A revulsion play i.e. too much debt is being issued?
Irrespective of why yields are rising, it’s not good for a potential recovery.