The best way to analyze the present is to look at the past. Ironically, the worst way to understand the present is to filter through the past. We are slaves to our experiences, yet experiences are the easiest way to provide a filter on what is unique to the current environment. The current economic environment is no exception.
We have to go back to at least the 1990 recession to begin some fruitful discussions of the current environment. This comparison provides a lack of comfort especially with bond rates. The CPI has hit 5% for the first time since 1991 and if the pull of commodity prices continues, then there will be further increases or at least an average rate higher than we have seen in years.
The important fixed income issue is that current 5-year Treasury yields are at 3.20% while the yield for the same Treasuries in 1991 was at 7.70%. The real yield today is negative in an effort to stimulate the sluggish economy while the real yield in 1991 was positive. Was the real yield the correct monetary policy for 1991? Certainly, the early 1990’s were a slow growth “jobless” recovery until after the 1992 election, but inflation was on a downtrend post-1990.
The take away is that we have a monetary policy that may be more stimulative but the nominal interest rates today do not fully reflect the inflation that we are seeing in the market. There should be no comfort for bond investors in the current environment.
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