When In Doubt, Return To The COVID-19 Playbook

  • The new waves around the world were predictable, knowable and should be short-lived. Meanwhile, vaccine doses go begging in the United States signaling a greater availability of our vaccine for export. This should go a long way to solve the situation in Europe and other parts of the world. 

  • Finally, lest we forget, there is the massive stimulus that has been pumped into the economy, almost $5 trillion (20% of GDP) in the past 12 months. Because of fear regarding economic impact of the virus, people held on to their money. With the economy on the mend and the greater confidence this will create these savings are available to satisfy pent up demand. Sprinkle on low or zero interest rates and we may have the ingredients for boom times.

  • But wait. There’s more … A major US infrastructure bill is in the works

Fear continues as the overriding emotion

Against this backdrop one has to ask why is the 10-Year US Treasury note trading at a 1.6% yield? Don’t blame it on the Fed and quantitative easing. As a source of demand for treasury securities the Fed is a drop in the bucket. With purchases scheduled at $125 billion per month ($6 billion per trading day) the Fed’s buy orders pale in comparison to the nearly half a trillion daily trading volume in the government securities market. If they took it away tomorrow no one would notice (unless you advertised it then they would scream bloody murder).

No, the 1.6% 10-yr UST represents to investors a very competitive yield alternative to investors around the world. For example the yield on the German 10-Year is a negative 25 basis points. Both are absolute safe havens for principal (except from inflation). Which one would you pick?

These returns represent a large body of investors so fearful of principle loss that they are will to take a pre-tax return below the desired 2% inflation rate to guarantee the safety of their principal. Based on what appears to be major positive fundamentals, which should be inflationary, there is no other reason that treasury note should be trading at such a low yield. I don’t get it..

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Disclaimer: The information presented here represents my own opinions and does not contain recommendations for any particular investment or securities. I may, from time to time, mention certain ...

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