The decline of US real bond yields, arguably to unprecedented levels, is unnerving. And it is probably wise to keep an open mind about the aspects of this story that we do not understand. I expect my own thinking here to evolve over time, with the new information and my own learning.
However, I want to return in this particular report to the issue of the depressed term premium in the yield curve. That makes the recession signal from the yield curve less compelling, as I have been emphasizing quite a bit recently. Beyond that, though, the low term premium is a reflection of a deeper fundamental, which favors higher valuations in both bonds and equities. This fundamental has nothing to do with QE or supply manipulations more generally, but appears to be anchored in the lowflation “Ice” regime.
Two recent “developments” have tended to reinforce my conviction on this point and I elaborate on them here. To avoid any suspense, the folks over at DE Shaw strike me as pretty smart. Given that I heard of their work through social media, I apply the conventional social media definition of smart as agreeing with me.