The value of U.S. Treasury bills continues to decline because the bonds are not priced properly to take into account likely inflation, columnist Mark Hulbert wrote in Barron's Magazine.
Long-term Treasury yields are unreasonably low. Over the course of the last century, long bonds have yielded substantially more than inflation. But that's not how bonds are priced today.
"The 30-year yield currently stands at just 4.3 percent," Hulbert wrote. "This means that just 1.9 percentage points of its current yield represent compensation for inflation over the next 30 years."
This is, as Hulbert eloquently puts it, "ridiculously low." Over the last 50 years, the lowest the Consumer Price Index has averaged over any trailing 30-year period is 3.2 percent annualized. The average has been 4.5 percent annualized.
"You should also keep in mind that, on no other occasion in U.S. history, did the monetary authorities inflate the money supply and flood the markets with as much liquidity as they have over the last 18 months," Hulbert wrote.
"It's difficult to imagine that in the wake of such inflationary policies -- policies for which the Fed Chairman Ben Bernanke earned the nickname of Helicopter Ben -- inflation would be markedly lower, on average, over the next 30 years than it has ever been in recent decades."
Even if inflation averages 3.2 percent per year for the next 30 years, the Treasurys "ought to yield 5.6 percent," Hulbert wrote. "That's 1.3 percentage points higher than where it yields now. To the extent that you believe inflation will be higher over the next three decades than this conservative estimate, the 30-year Treasury yield should be even higher."
The dive in Treasury yields has been so sharp in intraday trading that some bond market professionals have been reluctant to recommend clients invest in them. They worry about a whiplash if Wall Street gets a few days of upbeat economic reports, according to a report in The Los Angeles Times.
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