Domestic Bonds

Yields fall to European levels

Source:, Strategy and portfolio management Peter Dag

The chart above shows our real-time business cycle indicator (bottom panel) which is updated in each issue of Strategy and portfolio management Peter Dag. An exclusive free subscription is available for readers of this article. The 10-year Treasury bond yields are shown in the top panel.

Since 1910, there have been three completed business cycles. The most recent business cycle started in March 2020. The charts show that yields rise as the business cycle rises. They decrease when the business cycle decreases.

Trends in commodities and inflation and the relative strengthening in long-term Treasury bond (TLT) prices (discussed in the articles mentioned above) suggest that we are nearing the transition of the business cycle from phase 2 to phase 3.

The implication is that yields are likely to fall for the duration of the decline in the business cycle which could last around 2 years by historical norm.

There is another major force that acts on and lowers yields. the money speed is a measure of the rate at which money is exchanged in an economy. This is the number of times money passes from one entity to another. It reflects how much a monetary unit is used in each period. Simply put, it is the rate at which consumers and businesses in an economy collectively spend money.

The graph above shows the graph of the speed of money measured as the ratio of gross domestic product to money supply M1. The speed of money is important in measuring the rate at which money in circulation is used to purchase goods and services. The second line is the yield on 10-year Treasury bonds.

M1 comprises the most liquid parts of the money supply because it contains currencies and assets that are or can be quickly converted to cash.

There are two crucial patterns in the graph. The speed of money has been falling steadily since 2008. This reflects the idea that the Fed is “pushing on strength”. The liquidity put into circulation by the Fed does not stimulate economic transactions enough to stimulate the economy. It is no coincidence that the reserves of deposit-taking institutions soared by nearly $ 4 trillion.

The point is, there is a lot of liquidity in the system. This liquidity does not stimulate growth as evidenced by the weakening of the speed of money.

The chart above also shows that bond yields have closely followed the speed of the M1 currency in its decline. Yields are falling because Washington tries to solve economic problems by giving people “stimulus money” rather than stimulating productive investment.

Demand management doesn’t work, and my previous articles listed above have documented long-term downward trends in the growth of the US economy.

The United States, Europe and Japan experienced massive debt creation with the illusion that it would boost their economies. The exact opposite has happened. The result is that after decades of monetary failure, government bond yields have long stagnated at near zero percent in Europe and Japan.

What happened in Europe and Japan is what we should expect in the United States. Yields will drop nearly zero percent, reflecting the failure to print an absurd amount of money in an attempt to manage demand. Decades of experience show it’s a failure,

The recent sharp rise in inflation is creating negative feedback on consumer spending. This is already the case in the housing sector. Finally, consumers recognize that their purchasing power has been seriously reduced. The decline in purchasing power will trigger the transition of the business cycle from phase 2 to phase 3.

The bond market is well aware of the conundrum of inflation. Bonds are looking at the misguided economic policy that will create stagnation and much lower bond yields.