Why US yields will hover around 0% (or negative) until 2030-2035‏

With US yields at 2.18% and German bunds rising to 0.52% today (from 0.05% only 2 weeks ago) and with so many market participants calling this the end of a 30-year bull market for government bonds, I decided to elaborate on why I think market is wrong and why I think FED’s rate will hover around 0% (or go negative) between now and 2030-2035. Even if inflation kicks in, I believe central banks have no alternative but to suppress rates.

If you look at Japan for example, 46% of its tax revenues is used to pay interest on their debt. This is essentially a bankrupt country. Yet, their yields kept coming down since 1980 and are amongst the lowest in the world. How can you explain this? When I studied finance in early 2000s, yields used to represent the combined views on GDP growth, inflation expectations, risk premium and liquidity. But this model is outdated now. Does the 10 year views on Japan GDP growth + inflation + risk + liquidity = 0.35%? Central bank are distorting conventional finance. That´s why I did not pursue the CFA. What´s the point? We no longer live in a world where technical knowledge matters! Learn the jargon of central banks, know the right people, understand market cycles & money flows .. and you´re assured a future in Finance.


June-15 rate rise or QE4?

When I hear Janet Yellen saying the FED is contemplating raising rates in June or September .. I wonder why market participants still buy into this story. Who cares what numbers the FED puts out anyway? What they do represent – when they can tweak them at their will with inventory building, Obamacare spending, labour participation rate all contributing to inflate / deflate the official numbers to serve their agenda? Sadly for them the major drivers of economic growth (population, productivity, debt levels) are harder to tweak, so whichever economic indicators they report .. rates won’t be allowed to go above 0.5% or 1%.

I understand the timing of a possible small rate rise drives markets in the short term, but does it make that much difference if they’re 0% or 0.25%? How can the market not see the game the FED is playing and how can this institution still have any credibility? Pretending a rates rise is just around the corner (when in reality QE4, QE5 is a much more likely scenario) is their strategy to keep people under the illusion the economy is on solid footing and that we’re operating in normal times. To me is so crystal clear the world can’t afford higher rates and that Central Banks will do everything within their power to prevent them from rising .. that the fact the market sees this differently is beyond me! Yields won’t surely go down in a straight line (for example they reached 3% in Dec-2013 only to come crashing down again) but the trend down seems unstoppable and irreversible. I can see the US 10 year yields at 0% in the next couple of years. And I’m afraid they’ll stay there for a looong time.

In fact, if we want to look at the future we have to look no further than Japan, which is 20-30 years ahead of us. As its society aged and debt levels increased, yields on interest rate kept coming down so that debt service costs to income remained in balance. Conventional finance says that as debt levels increase, so does interest rates to reflect the additional risk of default. However central banks stepped in to prevent market forces to prevail. Their current job is NOT to ensure full employment or 2% inflation. Central banks´ current job is to ensure governments can keep servicing their interest costsPERIOD! That is their agenda, but they can´t say it, so they keep throwing noise at us about being “patient”, about waiting for optimal unemployment rate, etc…

Interest rates won´t go up simply because the world can´t afford it. And in the absence of a functional political democratic system, it´s down to central banks to ensure this equilibrium by buying Government bonds in an unprecedented scale. They now hold between 20-30% of all outstanding government bonds. And they will keep buying until debt levels stop growing. But the longer rates remain zero, the more indebted the world becomes, hence the more bonds central banks have to buy to keep the balance. They will eventually be forced to hold 100% of it. Whether this will create inflation and what the implications are, that is a topic for another future post, but in short I think inflation will only manifest itself in paper assets, not real economy.

Negative rates and cashless society?

If you look at the yields in the last 30 years, there´s nothing to suggest yields will reverse course and start going up. It’s quite the opposite and the establishment knows that. In fact rates have to go into negative territory to bring down debt levels to sustainable levels. Ideally combine that with some inflation. That would be the perfect mix, negative rates and inflation! However negative rates face a formidable opponent: Our beds’ mattresses. People will start hoarding cash under it as soon as rates drop below zero (or perhaps -0,5% as many people are strangely lazy when it comes to their finances). In order to prevent that, Governments are now contemplating abolishing the use of cash altogether in society, essentially punishing savers for being prudent and forcing them to suffer losses by having money on their bank accounts. This will give them flexibility to move rates gradually into negative territory or to a more drastic -5 or -10% whenever the next crisis hits. Willem Buiter from Citibank recently issued a research report saying the FED’s rate should have been as low as -6% during the financial crisis of 2009 (using the Taylor Rule). Obviously we couldn’t go there as people would simply withdraw their cash savings and put under the mattress. But if cash is no longer allowed (under the pretence that we must fight terrorism and tax evasion) then this policy becomes plausible. The alternative to the mattress is that we spend it, which is also welcome by the Government as it helps the economy and its tax revenues.

If you’re still not convinced, let’s actually look at the US yields in the last 100 years

10 year yield

We all know we are in uncharted territory (as far as debt levels, rates, central bank’s activism is concerned) so any prediction based on historical data offers little help. Still, the best proxy we have is the Great Depression, so let’s zoom in at those years and try to learn something from it. Couple things stand out to me:

  • It took 11 years since the depression started in 1929 to see the lowest rates (1.9% in Dec-1940)
  • For 27 years yields ranged between 2% and 3%. It wasn’t until 1956 that we started seeing rates rise above 3%.


We’re nowhere close to the bottom of the cycle, as far as yields are concerned. I believe it won’t be until 2030-2035 that they’ll start rising. Even in the event of a major crisis (or war) with subsequent defaults, I’m still convinced that yields won’t go up for a long time. Take a look at the period 1929-1956 to see how yields are likely to evolve from here. Whether you have savings and don’t know what to do with them, whether you´re considering floating or fixed rate for your mortgage, whether you´re retired and want to know what your pension will be, etc. it’s very important to form a view on rates. Knowing what’s coming can save you substantial money.

Follow me on Twitter @ricardo_afonso_


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