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SOME PHENOMENA BEST ARE POLITELY IGNORED, as one would try to do with a dotty relative. Yet there she is, often blurting out uncomfortable truths about whatever to whoever is within earshot.
So it is with the continued crash in Treasury yields. Investors have contracted to lend to the U.S. government at returns so low as to be unimaginable just a few months ago. For instance, it was only three months ago that it was confidently asserted those returns had nowhere to go but up.
But on Monday, Treasury note and bond yields were knocking on psychologically important round numbers. The 10-year Treasury note hovered just above 3%, the lowest since late April of 2009. Meanwhile, the 30-year long bond was just above 4%, a level that hadn't been revisited since early last October.
Further in the yield curve, the five-year note already had broken through the 2% barrier last week. The three-year note yielded only a bit more than 1%. And the two-year note -- the Treasury maturity most sensitive to expectations about the future of short-term interest rates -- traded at 0.63%, a trivial margin over the 0.60% low touched in the darkest days of the financial crisis in December 2008.
And yet, economists I polled for the Current Yield column in this week's paper edition of Barron's hewed to the current status quo. The Federal Reserve may lift its federal-funds target sometime in 2011 while the benchmark 10-year Treasury note yield may climb back to the high end of its recent range.
Owing to the constraints of space imposed by a print publication, I had to give short shrift to the considered opinions of these distinguished economists. I should like to remedy that partially here.
Joe Carson of AllianceBernstein looks for a "New Mix" of emerging-market-led demand leading the global cycle higher. Jim O'Sullivan of MF Global sees the underlying growth trend intact, elp by "extraordinarily stimulative" momentary policy. Mike Lewis of Free Market Inc. bristles Fed Chairman Ben Bernanke's "prolonged ultra-low rate strategy" will prove as disastrous as when his predecessor, Alan Greenspan tried it, which will result in a sharper-than-expected tightening to make amends.
Still, even those who see the contractionary forces restraining the economy look for Treasury note yield to return to the middle of their recent road. Dave Resler of Nomura saw a "not insignificant" risk of deflation saw the 10-year Treasury moving back to the mid-3% range over the next 12 months. So did Paul Kasriel of Northern Trust, who made powerful points about weak money and credit growth and fiscal policy makers wanting to return to the good old days of the 1930s.
One reader took me to task for sorely lacking imagination in these forecasts that stuck close to shore. That excluded Gluskin Sheff's Dave Rosenberg, who consistently sticks out his neck and looks for 10-year Treasury yields with a "2 handle," which is only a few basis points away.
Yet the interest-rate team at Royal Bank of Scotland implores investors to "think the unthinkable" -- sub-2% yields on 10-year U.S. Treasuries and German bunds, 2.5% 10-year U.K. gilts, as the global financial system is perched on the "cliff-edge." This is anything but group-think, especially as the Group of 20 appears to be embracing fiscal austerity as the global economy may be poised on a renewed downturn.
The New York Times columnist and Nobel Laureate, Paul Krugman aroused much chatter with his Monday column that the economy appears to be heading to the Third Depression, after the prolonged downturn of the late 19th century and the Great Depression of the 1930s. Krugman echoed points made in this space recently ("G20 Channel Herbert Hoover," June 8), notably the economic version of blood-sucking leeches theory that Draconian budget cuts will stimulate the economy by boosting business confidence.
The federal government seems to be thwarting economic recovery new entitlements for health care, proposed financial regulations, plus looming tax hikes. Meanwhile, supposed stimuli to automobile and home purchases are wearing off. On this point, permit me a digression.
There seems a superficial analogy drawn between the auto sales following the "cash for clunkers" program and the end of the tax credit for first-time and certain other homebuyers. Car sales have bounced back after the short, sharp drop when clunkers scheme expired; therefore, home sales should do the same.
Except that the clunkers program required the gas guzzler that were turned in to go into the crusher. That's resulted in a tighter supply of used cars, and in so doing, denied many working people affordable transportation.
By contrast, there is a huge overhang of houses for sale. In addition to the fleet of foreclosed houses, there are huge numbers of other houses that owners are eager to sell once the market improves (what technical analysts call "overhead supply.")
For those who are listening, record-low Treasury note yields are screaming an unambiguous message: the market is discounting deflationary, depression conditions, even if mainstream economists are not.
Comments: randall.forsyth@barrons.com
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