It’s The Interest Cost, Stupid!

It’s been quite the round-trip. Today’s 10-year UST yield of 4.55% last hit that level exactly 16-years ago at the end of September 2007.  But here’s the thing: The plunging interim dips in the chart would never have happened on the free market in the context of an honest dollar. And most especially, the absolute low-point of 0.55% in July 2020 would not have happened in a thousand years.

Given that the inflation rate (trimmed mean CPI) averaged 2.53% per annum during that period and the real yield on a ten-year government debt security ought to be at least 200 basis points to compensate investors for the time value of money and taxes owed on the coupons, it appears that investors got an adequate return during only 2 of the last 192 months. And that, of course, did not begin to compensate for the deep negative real yields during much of the period.

Yield On 10-Year UST, September 2007 to September 2023

For avoidance of doubt, here is the inflation adjusted yield on the 10-year UST for the same period. Most of the time the real yield was negative or negligible, and for the period as a whole averaged just +0.06%.

That’s right. For the past 16 years the cumulative inflation-adjusted return on the very benchmark security of the entire global financial market was a pitiful six basis points.

Is it any wonder, therefore, that the financial markets have become rife with speculation? Or that the private sector is now freighted down with unprecedented leverage? And that’s to say nothing of the soaring debt levels piled-up by the public sector. The Fed’s message to one and all has been: “Come and get it, debt is tantamount to free.”

Inflation-Adjusted Yield On 10-Year UST, 2007-2023

What is especially striking about the above graph is that after 18 months of aggressive interest rate raising by our clueless central bankers, the real 10-year rate during August was still -0.3%. What this means, of course, is that the Washington politicians are still being told not to sweat the public debt because the true interest carry cost is being suppressed at the expense of savers.