The West’s lost decade has begun

Today, US 10-year government bond yields traded below a critical 2% yield level, a record low - the west has entered a period of stagnation.

We’re in deep trouble. Today, US 10-year government bond yields traded below a critical 2% yield level, a record low. The global bond markets are now signaling stagnating growth, borrowing out of control and unemployment rising.

Since 1997, the Japanese economy has stagnated while yields have never gone above the 2% level.

The graph below shows the history of the yield on the benchmark 10-year US Treasury (UST) and 10-year UK gilt bonds since November 1999, just before the peak of the NASDAQ, to yesterday’s record low yield. 

Overlaid is the history of the equivalent benchmark 10-year Japanese Government Bonds (JGB), but this time taken from September 1990, after the Nikkei 225 had peaked. This shows the 10-year JGB yields trending below 2% and then staying there.

This is the error in the orthodox analysis of the economy: to not take into account the portfolio decision on how and in what to invest. 

Lower and lower bond yields do not mean continually rising confidence.  In fact, at some stage, falling bond yields implies a fast-rising concern about the economic future. 

In a large economy, with a deep savings market, where domestic holdings of your debt are above 50%, such as Japan, UK or US, in a situation of a Japan-style stagnation, investors know that if they invest in government bonds they will at least get their money back (even if you monetize it for them). 

Very low yields signals a mentality of return of capital, rather than return on capital. For example, today, the UK Debt Management Office sold £4.5 billion 5-year gilts at 1.507% yield.

Never mind the current negative real yield, this is half a percent below the Bank of England’s long term inflation target.  Investors are saying that right now, they’d rather lose versus inflation for 5 years than invest in anything else.

A 2% yield signals a complete breakdown in our investment-growth cycle: rather than investing, investors would prefer to lend to the government at 2% for 10 years. 

The current swift move by 10-year UST’s to 2% also has some scary read through for the equity market:  When 10-year JGB’s went below 2% yields, the Nikkei was 40% off its peak value. 

In terms of the FTSE 100, that is equivalent to an index value 2,800. While that is still some way off, we’re 1,000 points closer to it than we were on 7th July.

The bond markets are signaling that on current macro policies, we are facing a Japan-style wasted decade.

7 Responses to “The West’s lost decade has begun”

  1. Will Straw

    Must read from @CormacHolly showing how low US/UK bond yields mirror Japan 1990-2002. We're heading for a lost decade:

  2. Jonty Olliff-Cooper

    Must read from @CormacHolly showing how low US/UK bond yields mirror Japan 1990-2002. We're heading for a lost decade:

  3. Rob Marchant

    Think it remains to be seen whether we are headed for a slump. However, what is certainly clear is that the West (Europe and the US) are suffering from a frustrating lack of leadership, while emerging economies rush ahead. Futher reading here.

  4. Dave Citizen

    I don’t think we are failing for lack of movement itself (as conventional growth enthusiasts would have us believe) but rather lack of a clear direction in which it would be best to move.

    Rob – I am not at all convinced by descriptions that present simplistic choices or dichotomies such as: either come together with Europe to gain effective negotiating scale ‘or’ waste our chance by arguing about sovereignty.

    We need to develop a coherent basis for generating prosperity in the real world of today and we need to be prepared to think about creating prosperity in ways that take us beyond a simple continuation of competing better in a global market. It looks to me that the world simply can’t make enough people prosperous in that old model any more.

    Providing leadership is likely to be difficult for anyone with vested interests in the status quo – vested interests, what in Britain?!

  5. Mark Stevo

    Well this is a lot more coherent than Cormac’s last ramblings on the topic of low bond yields.

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