REAL TREASURY YIELDS LOWER THAN INFLATION RATE

Lower yields – higher inflation. Some call it Financial Repression… Investors in Treasury securities will have to get used to yields lower than the U.S. inflation rate, according to Andrew Garthwaite, a global strategist at Credit Suisse Group AG.

The real yield on 10-year notes is less than zero for the second consecutive year. That hasn’t occurred since the 1970s, according to data compiled by Yale University Professor Robert J. Shiller. The real yield is calculated by subtracting the 12-month percentage change in consumer prices from the notes’ yield.

To reduce the ratio of government debt to gross domestic product and to bolster employment, the U.S. and other developed countries need to bring down real yields to minus 1.5 percent to minus 2 percent, the report said. Federal Reserve policy makers indeed decided to hold down their main interest rate as long as unemployment exceeds 6.5 percent and projected inflation is less than 2.5 percent.

The decision bodes well for stocks and points toward faster (nominal) GDP growth or accelerating inflation. The latter should raise your attention: Higher inflation expectations are risky in this debt trap territory. At some point, higher inflation expectations will make it difficult to keep interest rates low. That is when solvency issues turn into liquidity issues very rapidly.

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