Unusual Concurrence

In the San Francisco Chronicle, Kathleen Pender writes about the unusual concurrence of T-bonds and gold both rising in the first half of this year. The Eurocrisis is the overall reason, but there are special reasons behind the rise in bonds. First of all, banks can buy them for a risk-free return after borrowing money at near-zero rates; that adds demand for Treasury securities. Secondly, there's the widespread comparison of America to Japan: the latter saw long rates go from 2.1% downwards after Japan's zero-interest rate policy was put in place in 1999. Gold, of course, has been moved by the fear trade.


The two markets really show a profound split in the disaster circuit. T-bond bulls tend to be deflationists, who see America's fate as mirroring Japan's of the last two decades. Gold bulls tend to be inflationists, seeing America's fate as repeating the 1970s. Of course, the U.S. government has a huge incentive to keep bond and bill rates as low as they can go given the huge U.S. debt load. Should Treasury rates go back to where they were in the mid-1980s, the U.S. budget would groan under a huge interest-payment loadstone. As others have noted, the U.S. government also has a large incentive to understate the inflation rate too.