Jim Grant, the financial world’s adult in the room, says the bear market in Treasury bonds could last for decades. Do the long-term charts support this dire prediction? The one reproduced above suggests that it’s at least possible that we are in the early stages of such a move. Most immediately, the chart projects a further rise in 10-year rates to at least 5.5% over the next 2-3 years, a 45% leap from the current 3.9%. If this were to occur, it means the deflationary bust I have long predicted will have to wait. That’s because rates that high could not possibly co-exist for long with falling asset values.
Think back to the real estate crash of 2007-09, when home prices across the U.S. plummeted by more than 10% per year. This subjected property owners with 5% mortgages to crushing real rates exceeding 15%. If credit stimulus had not bailed them out and stabilized property values starting in 2009, millions of homeowners would have been pushed into bankruptcy.
All Bets Are Off
This will happen eventually when deflation ‘cancels’ public and private debts that long ago became too large to repay. For now, however, inflation will continue to rule if nominal rates are in fact headed to the 5.5% ‘Hidden Pivot’ target shown in the chart. Thereafter, all bets are off, since nominal rates could fall below 2% and still be asphyxiatingly high in real terms. The corresponding rise in the price of Treasury paper would bring about a bull market in T-bonds. That’s not what Jim Grant envisions, although the outcome, a U.S. and global economy reduced to ruin, is congruent with things he has been writing about for decades.
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