A 5% Yield Feels Low On The 10-Year
Back in August when we wrote about a 5% yield on the 10-year Treasury we used the old historical Fed Funds Rate to 10-year spread methodology to arrive at a 4.50% long-term yield for the 10-year. If fixed income investors ever really start to give the U.S.’s ability to pay its debt more thought, the 10-year yield could go much higher.
The 1.49% historical spread between Fed Funds and the 10-year that we referenced in our earlier article does not adequately contemplate today’s Treasury debt levels and the U.S.’s ability to pay back its debt. The simple truth is that the U.S. is insolvent, it is only able to pay down its debt by printing new money which by definition devalues the existing money supply, thereby eroding the value of the Dollar.
Therefore, if you know that the value of the underlying collateral is going to decline, wouldn’t you want a larger spread over Fed Funds as compared to the 1.49% historical spread? Wouldn’t you want more than 5% on a 10-year bond if you know that the issuer is growing debt (Treasury Debt) multiples faster than Revenue (Tax Receipts)?
5% feels low on the 10-year when you look at yield through a solvency-based lens.