Bubble in Treasuries?

There has been a lot of talk about the bubble in Treasuries, but there's good reason to think that that talk is overblown. Here's a FT Alphavile summary of a Goldman Sachs note arguing that there's no bubble in US Treasuries.

What is Goldman's basis of argument?

1. Long-dated Treasury yields are first and foremost driven by the expected rate of inflation. The US economy is in a tailspin, and as the Fed acknowledged in the minutes they released,we'll have "disinflation" until at least 2010;
2. While there is the potential for "bond vigilantes" to demand higher yields, the Fed has already warned the market that they will buy Treasuries if necessary. In other words, if Treasury prices do start to collapse, the Fed will buy, and support prices. The Fed will do this to maintain the lowest possible rates in the economy;
3. While the supply of Treasuries will increase sharply, this probably won't cause an absolute increase in yields. Indeed, there's very little historical evidence that a greater supply of gov't paper has a meaningful impact on bond yields once macroeconomic conditions are accounted for.
   
   Read the FT Alphaville's summary of Goldman's note for more details.

But also, consider the Japanese experience. 10 year yields fell from a peak of 8% to a low of 0.5% during their lost decade episode. And that occurred in the face of some core CPI inflation.


Above graph from an excellent Martin Wolf piece,‘Helicopter Ben’ confronts the challenge of a lifetime, from Dec 2008.