Just checked the bond yields...havent done that for over a week and I was shell-shocked... I know I've been talking about deflation, risk-aversion, etc etc...but didnt' realize that 3 month bond yields in the US were at 4 basis points, i.e. 0.04% !
Well I'm no bond trader and this interpretation might be incorrect since current prices are a reflection of tomorrow's reality.. Another way to look at this that bond traders may be expecting a further in inflation index (change in the values of the index gives us inflation levels) three months from now, i.e. a fall in price levels in the next three months (as opposed to measuring yoy inflation which is reported by the media). This may the correct way to look at the yields since inflation has just been reported as fallen by 1% in the US (read blog post).
The other possible story is that of extreme risk aversion.. Treasuries are considered risk-free (though CDS swaps on the Treasuries are creeping upwards). If you're petrified of holding any risky asset, then you'd hold cash..or US Government bonds.. Cash yields no nominal return. So you'd continually switch from cash to US Treasuries so long as the Treasuries do not yield a negative nominal return. The assumption here is that Treasuries are risk-free and easily convertible to cash with minimal transaction cost. This gives me an idea..maybe the 4 basis points of yield left on the bond reflects transaction costs?
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