JP Morgan is out with a report telling investors not to worry about surging bond prices and that they do not necessarily mean we are entering a deflationary spiral as some have postulated. Looking back at prior economic cycles, JP Morgan notes that bond yields often bottom out approximately 2.5 years after the end of a recession. So the current rise in price of the 10-year Treasury is not completely unexpected and is simply following the pattern from previous recoveries. The firm also says that the two primary catalysts for the recent rise in bond prices are a decrease in inflation expectations and record buying of US bonds by US households. The current 5-year break-even rate on bonds is 1.3%, down from around 2% reached backed in June. Furthermore, US household purchases of treasuries has surged 46% year over year in Q1 2010. In fact, households are the second largest holder of US treasuries, ahead of Japan and only $100 billion behind China. If that was not enough to arrest deflationary concerns, JP Morgan goes on to mention that the strong resiliency of commodity prices indicates that deflation is a remote possibility at this point. I agree, oil at 75, copper at 3.30, and gold at 1238 hardly make sense if we are entering a deflationary period. The deflation scare mongering is just a ploy by central bankers to print more money. Below is a chart which shows the 10-year Treasury over the last 35 years.
Here is the full report from JP Morgan:
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Here is the full report from JP Morgan:
