U.S. Treasury Yields

This page is created to monitor the U.S. treasury yields. Recessions can be predicted clearly as they coincide with narrowing yield spreads.

As you can see, the yield spread narrowed in 2000 and 2007, which were the omens of two recessionary events: NASDAQ bubble and 2008 crisis.

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GDP Growth Rate Vs. 10 Year U.S. Treasury Bond Yield

The 10 year treasury bond yield can be viewed as the fixed-income market’s assessment of current nominal GDP growth on a year to year basis.

So from the chart below: GDP growth (red) should correlate to the 10 year U.S. bond yield (blue).

By monitoring the 10 year U.S. bond yield, you should have a good view on U.S. nominal GDP growth.

U.S. Debt Crosses 17 Trillion

As predicted before, the debt ceiling would be raised and now the treasury is going to issue an enormous amount of debt. The debt will now spike a lot to get the budget in order for the whole year of 2014. The Federal Reserve will now buy up all this debt and the U.S dollar is set to weaken as China will reduce its purchases of this debt. Evidence is to be found in the Chinese rating agencies. For example Dagong downgraded U.S. debt.

Just after the debt ceiling deal on 17-oct-2013, the debt increased from $16.7 to just over $17 trillion.

This is what it looks like. You can see that the slope is higher as usual as they are in need of cash.

U.S. Treasury Bills: Canary in the Coal Mine

Here we see the 1 month, 3 month and 1 year treasury bill yields.

You see that little spike at the end of the chart? That’s the 1 month T-bill yield and it’s the canary in the coal mine for the longer maturities.

1 month yields were higher than 1 year yields, indicating default risk.

QE As Far As The Eye Can See

I don’t think we will ever see a taper again and here is why. One simple chart.

As you can see the 10 year treasury yield is now at 3% and surprisingly, this is almost as high as during the 2008 financial crisis, where the yield was 3.6%.

But there is one big difference between then and now and that is that the U.S. public debt has doubled from $9 trillion to $17 trillion.

So today we are worse off as compared to 2008. To keep yields down I don’t see any other option than QE to infinity.

There is this question on how long QE can continue to raise equity prices. Do you think this can go on till infinity?

Of course not, first off, I showed with the Potemkin anti-rally that the Dow Jones hasn’t been rising along QE. But more importantly, we need to watch what the U.S. dollar is doing.

That’s why I made this chart to show the Dow Composite Index, weighed to the U.S dollar index ( blue line). You can see the blue line has been flat lately, even though the Dow Composite went up ( green line). That’s because the U.S dollar has been going down recently (TWEXMMTH). The red line shows the expanding Fed balance sheet.

We need to keep monitoring this, because once the green and blue line diverge from each other, we’re basically going into hyperinflation mode.

30 Year Fixed Mortgage Rate Vs. 30 Year U.S. Treasury Yield

This page is created to monitor the 30 year Conventional Fixed Mortgage Rate Vs. 30 year U.S. Treasury Yield.

There is an obvious historical correlation here. The thing to watch here is that the mortgage rate (blue chart) should always be higher than the treasury yield (green chart).

When this is not the case, U.S. treasury yields should decline / mortgage yields should increase.

Gold Vs. 10 Year U.S. Bond Yield

This page is created to monitor the Gold Price Vs. Bond Yields.

Historically, when the 10 Year U.S. Bond Yield declines (red chart), gold will have an up move (blue chart).

The red chart is actually the equivalent of the TIPS yield (Treasury Inflation Protected Securities), which is the Treasury Yield of U.S. Bonds minus the rate of expected inflation. The correlation between TIPS and gold is best visible when we invert the TIPS yield. Source: blog.yardeni.com

China Boosts U.S. Treasury Holdings

China buys more U.S. treasuries to keep the yuan from rising.

Chart 1: China U.S. Treasury Holdings

Correlation: 30 Yr. Treasury Yield Vs. 30 Yr. Mortgage Rates

Just wanted to add another couple of correlations to my collection. We will learn about fixed and adjustable rate mortgages. These are correlated against treasury yields and fed funds rate respectively.

1) Conventional (Fixed) Mortgage Rate Vs. Treasury Yields

As you can see mortgage rates are always higher than treasury yields because U.S. treasuries are considered much safer than mortgages.

Chart 1: 30 Yr. Treasury Yield Vs. 30 Yr. Mortgage Rate

2) Adjustable Mortgage Rate Vs. Fed Funds Rate
Adjustable Rate Mortgages on the other hand are linked to the Fed Funds Rate.

Chart 2: 1 Yr. Adjustable Rate Mortgage Vs. Fed Funds Rate

China Ups U.S. Bond Holdings

Surprisingly, China bought even more U.S. bonds and is now again the champion, just before Japan. Almost every foreign country increased its U.S. bond holdings in December 2012.

And now realize they are making a loss on that purchase as yields went up.

Chart 1: China U.S. Treasury Holdings