Of potentially greater significance for fixed-income investors, buyers of these Treasury securities at their June yield highs has enabled investors to lock in the high rates for periods of 10 to 30 years, depending upon the maturity date of the bonds पुर्चासेद.
The key question is: will this trend continue? Or, to put the matter in a wider analytical perspective: has the 25-year bull market in Treasury bonds (and the accompanying DECLINE in yields) come to an end, despite the short-term bond rally?
Many have argued that this, in fact, is the case. We are now in a long-term bear market for Treasuries, equating to a long-term uptrend in rates, according to this school of thought.
We will confess to a strong skepticism on this point। The crucial factor is the future rate of inflation. Neither the current rate nor "inflation expectations" offer much help in assessing what the future rate of inflation is likely to be.
The seeming pervasiveness of the popular view that inflation is bound to rise is, in and of itself, a contrary indicator, we think।
More to the point are the likely continuation of factors which have created a global environment tilted in a disinflationary direction। Intense global competition, the lid on the price of labor in consequence of the contining and prospective entry of large numers of workers moving from the rural to the urban sector in "emerging" economies, the probability of the locus of low cost labor shifting from China to still more impoverished, overpopulated, and underdeveloped countries, the accumulation of excess capital in Asia and the Middle East,the increasingly pervasive reliance on the internet -- a tool which exerts downward pressure on prices across the board by imposing transparency on comparative prices offered for the same product by competing producers -- will likely remain operative in the future।
The periodic puncturing of asset bubbles, whose recurrence is virtually assured by the ample global liquidity and the global desperation for higher returns in a low interest rate environment, constitutes a deflationary factor of considerable proportions।
The decisive component in the equation remains, of course, the money creation policies of the key central banks। Inflation, after all, is a monetary phenomenon. Whatever the fundamental price trends, decisive action by the key central banks can negate them. On this score, long-term Treasury bond investors can feel reassured by the seeming unshakability of the persisting inflation-phobia of the Federal Reserve, the European Central Bank, and the Bank of Japan. The policymaking echelon of these banks is overwhelmingly populated by individuals who have a profound dread of inflation, coupled with a near-blind determination to crush it, whatever the cost. While countervailing pressures from politicians and financial markets during periods of crisis -- such as the current one -- may force these monetary policymakers to temporarily suspend their crusade against inflation, we doubt that they will adopt a less hostile view of the hated enemy.
The bottom line is that the major central banks are inclined, over the long term, to remain very tight with money creation, thereby assuring the persistence of the disinflationary trend long into the future। It would take a massive replacement of the current group of monetary policymakers, a drastic change in the mindset of the economics profession, or a catastrophic global deflation to alter the orientation of the major central banks.
For these reasons, and in the absence of countervailing evidence, we believe that the long-term bull market in Treasuries, and the secular decline in interest rates, are more likely to continue than not.
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