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Treasury Yields: A Long-Term Perspective

  • Written by Syndicated Publisher No Comments Comments
    July 18, 2017

    Let’s have a look at a long-term perspective on Treasury yields as of Friday’s close. The chart below shows the 10-Year Constant Maturity yield since 1962 along with the Federal Funds Rate (FFR) and inflation. The range has been astonishing. The stagflation that set in after the 1973 Oil Embargo was finally ended after Paul Volcker raised the FFR to 20.06%.

    Last year was a remarkable one for yields. The 10-year note hit its historic closing low of 1.37% in July and then rose 123 BPs to its 2016 closing high of 2.60% in mid-December. The yield on the 10-year note to date has dropped to 2.36% as of Friday’s close.

    Now let’s overlay the S&P 500 to see historical pattern of equities versus treasuries. This is a nominal chart, which significantly distorted the real value of both yields and equity prices.

    10-year Yield since 1962

    Here’s the same chart with the S&P 500 and 10-year yields adjusted for inflation using the Consumer Price Index. The impact of stagflation becomes much clearer. We can better understand the severity of the decline in equities from the mid-1960s to the bottom in 1982. And we can also see why high yields can be deceptive in periods of double-digit inflation.

    Real Yields

    The most interesting series in the charts is the FFR red line. We can see how the Fed has used rate to control inflation, accelerate growth and, when needed, apply the brakes. Unfortunately, the FFR has been virtually zero since December 2008, so it is no longer available as a tool to stimulate the economy. Incidentally, we’ve annotated the top chart with the tenures of the last three Fed chairmen so we can see who was managing the various FFR cycles since the summer of 1979.

    The next chart is based on daily data and adds some additional Treasuries for a close look at yields since 2007.

    Yields since 2007

    Here is a closer look at the trend in the 10-year, this time using a log scale vertical axis for a more accurate reading of the relative changes over time. We’ve added a trendline using the highs since the end of the decade of stagflation. The trendline helps us see the substantial impact of the Financial Crisis and Fed intervention with zero interest rate policy (ZIRP) and asset purchases.

    10-year Yield (Log Scale)

    Now let’s see the 10-year against the S&P 500 with some notes on Fed intervention.

    Fed Intervention

    We update the long-term charts periodically and the last chart more frequently, depending on yield volatility.

    Other Treasury Updates:

    Treasury Yield Snapshot

    Images: Flickr (licence attribution)

    About The Author

    My original dshort.com website was launched in February 2005 using a domain name based on my real name, Doug Short. I’m a formerly retired first wave boomer with a Ph.D. in English from Duke. Now my website has been acquired byAdvisor Perspectives, where I have been appointed the Vice President of Research.

    My first career was a faculty position at North Carolina State University, where I achieved the rank of Full Professor in 1983. During the early ’80s I got hooked on academic uses of microcomputers for research and instruction. In 1983, I co-directed the Sixth International Conference on Computers and the Humanities. An IBM executive who attended the conference made me a job offer I couldn’t refuse.

    Thus began my new career as a Higher Education Consultant for IBM — an ambassador for Information Technology to major universities around the country. After 12 years with Big Blue, I grew tired of the constant travel and left for a series of IT management positions in the Research Triangle area of North Carolina. I concluded my IT career managing the group responsible for email and research databases at GlaxoSmithKline until my retirement in 2006.

    Contrary to what many visitors assume based on my last name, I’m not a bearish short seller. It’s true that some of my content has been a bit pessimistic in recent years. But I believe this is a result of economic realities and not a personal bias. For the record, my efforts to educate others about bear markets date from November 2007, as this Motley Fool article attests.
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