Bond Market Warning Signs

Given the continuing focus of those with the most influence on the need to placate the bond market I feel I am required – duty bound almost – to point out that the US government 2 year bond rate is now at 0.45%. That’s the lowest level on record. On record. Ever.

The 10 year bond also slid to 2.57%, and the 30 year is close to its all time low of 3.60%.

This is not a market telling us to cut deficits. This is not a market so slated with bonds that it is choking and requiring penalty levels of interest.

This is a market so scared that we are headed into recession that it is screaming for help.

The message from the market is: more stimulus please!

Anyone who doesn’t read this message correctly is just plain stupid. Or willfully and ideologically motivated to inflict harm and unnecessary pain on the economy.

Besides: think of this from a simple financing strategy: with money so cheap, why are we not borrowing as much as we can? At these cheap rates any stimulus thus financed would more than likely return a profit to the taxpayers. Using the Congressional Budget Office analysis from last May – it produced a very detailed analysis of the success of the original stimulus – I think we can safely assume that a a trillion dollar investment in targeted job creating programs, not the dross included in that last package, would produce about 2.5 million jobs, bolster tax revenues from the increased demand, and go a long way to kicking the economy into gear.

Now I realize that the Treasury has all sorts of funding issues to deal with, such as borrowing along the yield curve, meeting the demand for different maturity tranches, and maintaining liquidity in the bond market, but money this cheap is a rare opportunity.

Setting that all aside. The one thing we can all agree on – the scare mongers and myself – is that the credit markets are flashing warning signs. Where we disagree is what the warning is about. The scaremongers argue it is about imminent inflation and the crowding out of private investment. I think it’s about the risk of deflation and renewed recession.

These warning signs are real. We had better take notice.