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August 28, 1998
This morning's Treasury yields have reached new record lows -- 10-year notes were most recently lower than today's 5.08% in September 1967 -- but the event should not be confused with good news.
Mortgage yields have not followed Treasury rates down, and the low-fee 30-year stuff is still close to 7.00%. Rates on many other bonds have risen, and the overall spread between corporate yields and Treasury ones has widened from only a half percent to more than one percent. Of course, the yield on Russian bonds is academic, as there is no market.
It is possible that the flight to Treasurys is merely a healthy economic event preceding a Fed move to ease. A lot of serious people are saying an easing move is imminent and inevitable to stimulate the world economy, and so, buying Treasurys is just a good trade, not a sign of spreading panic.
Maybe so. As you study the following chart, remember that the Fed funds rate -- the overnight cost of money -- is pegged at 5.50%.
June Last week Today
90-day T-bills 5.00 4.93 4.88
1-year T-bills 5.38 5.09 4.92
5-year T-notes 5.48 5.13 4.90
30-year T-bonds 5.65 5.42 5.35
I think there is more to this week's panic than a slowing world economy and the possibility of a Fed easing. There is nothing in Russia's bankruptcy that was caused by a slowing world economy. Falling oil prices and revenue merely accelerated the process by a few months.
Further, Russia's meltdown did vastly greater damage to world markets than justified by the economics of the disaster. The true financial losses were sustained by banks well-reserved or government-guaranteed against loss, gamblers reasonably aware of risk, and the Russian people.
Another fear is at work here.
I have on my office wall a St. Petersburg (Russia, not Florida) municipal bond issued in 1904, which paid 4.5% in gold through 1918. In 1919, it became the wallpaper it is today. Eighty years later, and Russia hasn't learned a thing, except how to make nuclear weapons.
That's why the panicked lows in Treasurys aren't especially good news. Political events (in Russia's case, a truly lawless society) lead to economic events (bankruptcy), which if bad enough lead to more political events. The political forces unleashed in and near Russia today are enough to make anybody reach for a U.S. Treasury.
To have Bill Clinton visit Boris Yeltsin next week is... surreal, and no reason for anyone to lose interest in Treasurys. Somebody should remind Bill to bring some cash, as Boris can't afford the dinner check.
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