30-Year T-Bond Auction Suggests Inflation Ahead

That's the conclusion of Seeking Alpha contributor "The Housing Time Bomb," who points out that the disappointing 30-year T-bond auction two days ago suggests that the bond market is concerned about inflation, not deflation.

Included is a chart of Japanese 30-year govermment bond yields, which I've reproduced below:



The deflationary (actually,stable-price) episode begain in 1990, right after the peak in the yield curve. From then until 1993, there was a smooth drop in the yield, after which a several-month countertrend intruded. Then, yields kept falling until about 2000 and have stayed down since.

Compare the 1991-3 period to this graph of 30-year U.S. Treasury yields, from early 2005 to today:



This graph shows a different picture from the Japan one. Instead of a long-term fall, U.S. long rates took a three-month tumble and have climbed back up. As of now, long Treasuries are at about the average yield for the last five years. Since May of last year, there's been a wide trading range. The pattern of rates from June to this month looks a lot like March-October of '05.

Many gold skeptics have said that long bonds have not discounted any real inflation in the future. The above pair of charts is the counterpoint: unlike the Japanese bond market, U.S. long bonds are not discounting any deflation (or, for that matter, further disinflation) in the near future. If the U.S. economy going forward is destined to be like the Japanese economy of the 1990s, that "Lost Decade" is going to arrive in the form of another black swan. The bond market doesn't see it happening.


The argument and commentary that goes along with the first graph is here. It's well worth reading.