![]() Investing involves risk, including the possible loss of principle. Despite the pronounced inflation anxiety, by 1986 10-year Treasury yields were probing lows around 7 percent, about 300 bps lower than before the selloff in 1983 got underway. Anticipating an inflation resurgence, long rates skyrocketed early that year, with 10-year rates rising from 10.1 percent to a peak of 12 percent. In that year gross domestic product (GDP) grew at 7.9 percent. In the wake of the 1982 recession rates moved markedly higher in 1983. The bad news is that this would set the table for negative rates in the event of any unexpected bad news about the economy or financial system. The good news is that fixed-income investors can properly position their portfolios by not being underweight duration. The model estimate for a trough of -0.5 percent in early 2022 is bounded by a two-standard deviation range of a high of 1 percent and a low of -2.0 percent. Currently our model suggests that while yields may drift up from here, there is still more downside. In our model of 10-year Treasury yields, the sine regression of 10-year rates since the mid-1980s, actual yields have generally stayed within a two standard deviation range of the model estimates. ![]() Treasury notes, Agency debentures and mortgage-backed securities, municipal securities, and asset-backed securities. That unspent money eventually finds its way into securities markets either directly through investors or through banks choosing to invest deposit inflows in U.S. Some of the money is spent, but most is saved. This stimulus has facilitated a surge in cash holdings throughout the economy from increased precautionary savings by households, businesses, and state and local governments.Īs the stimulus checks go out, that cash moves into private sector checking accounts, causing M2 to balloon. The spike in M2 money supply can be explained by the massive fiscal stimulus deployed by the federal government, which was financed in large part by the creation of new money by the Federal Reserve. This is causing M2 money supply growth to soar at a rate of 25 percent over the past 12 months, more than five times the average annual growth rate going back to 1960. The Biden administration has decided to use more than $1 trillion of this excess cash to pay for stimulus rather than borrow new money. ![]() History tells us something different.Īs a hangover from the prior administration’s cash management, the Treasury currently holds about $1.6 trillion in its general account at the Fed, an amount far in excess of its pre-COVID cash balance target of roughly $400 billion. ![]() The foregone conclusion today is that long-term rates are on an uninterrupted trajectory higher. ![]()
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