Tuesday, August 16, 2011

Long term treasury rates in a bubble? Maybe not?

Talk of a bubble in long term treasury rates has been careening around the financial markets for a while now and considering the rate on the 10 year T note is approximately 2.22% right now I went looking for some perspective.

10 year versus nominal GDP:
Econompic has a great series relating nominal GDP growth versus the 10 year and the long term patterns are impressive. 
Note how during the rise in nominal gdp growth rates from the 60's to the 80's interest rates were below nominal gdp and this pattern flipped as nominal gdp growth rates declined.

90 day tbill rates versus 10 year:
Rarely does the spread between the 90 day tbill and 10 year rates go beyond 4% and with short rates at zero this puts a cap on interest rates further out the curve.  With 10 year rates at 2.22 this does provide some upside to the range of interest rates, but those recently calling for 10 year rates higher than 4% were calling for something truly exceptional.

Until we see nominal GDP growth really perk up and/or the Fed start raising interest rates I find the possibility of the 10 year going above 4% unlikely. 

Disclosure: I own long term treasuries in personal and client accounts.


  1. greg,lotsa talk on ben doing the 'twist' n going after long treasuries friday.

  2. That was my expectation for the Jackson Hole 2011 remarks however that was not explicitly state. In my post I make the case that this outcome is (Twist) is still likely.

  3. Yeah treasuries have had a great run and I'm examining whether I should sell now or hold. Right now my indicators are neither getting worse nor better (for the stock market) so I'm holding for now.