Friday, August 20, 2010

Treasuries: Bubble or Accurate Reflection of Slow Growth?

Sean over at Dead Cats Bouncing details:

While another economic crash landing remains unlikely given the inventory and corporate funding backdrop, there won't be much room for policy error either politically or at the Fed in coming months. Monthly headline US CPI has now fallen for three consecutive months, which has only happened a handful of times since the data series began in 1947. If you take the rough and ready rule that a 10 year government bond yield should equal the long term growth rate plus the long term inflation rate, then it's clear that a near 2.5% 10 year Treasury yield is pricing in a grim growth scenario.
Well, I for one was surprised just how strong the relationship has been.

Update: An anonymous reader commented:
I suspect both nominal GDP growth and treasury yields are mostly driven by inflation, since both real yields and real GDP growth vary less than inflation did.Which means all this graph is telling you is that inflation plus some noise is correlated with inflation plus some different noise
While inflation has indeed dominated the change in nominal GDP over the long run, real GDP has actually been more volatile than CPI over the course of the past ten years. Also of note; ten year annualized real GDP has dipped to 1.62%... the lowest level since the early 1950's.