Can long bond yield move towards 3%? What happens if the economy plunges into depression and deflation?
Sam Adelton
Jun. 24, 2007

Long bond yield in the future is the biggest suspense out there in the minds of the investors. The recent sharp moves downwards in typical of an extreme anti-climax move that normally happens before a long-term trend starts in the reverse direction.

Based on that theory, it is possible the long end of the yield curve can actually start dropping fast from here. It is possible that the 30-year Treasury bonds will yield 3%. But for that something has to happen in the economy.

The economy has to fall into some kind of major recession and the market perception has to change from inflation to deflation.

Then the question because what does the technical chart pattern of thirty year Treasury bond suggest? What is the probability of a major recession? What is the probability of deflation

The technical chart pattern of 30 year Treasury Bond is bullish like never before. If the yield goes down for whatever reasons, it will crash like never before. The yields can get to 1% replicating what happened in Japan.

But look at the commodity market. Most commodities are going up. The low end of the job market is tight. As a result the bond market collapsed sensing imminent inflation and possible Fed rate hike.

What the market gurus (detached from real world in the main streets) overlook is the state of the real economy – the middle class America. The fact is the economy is running on one single engine called debt engine. The fuel is running low and the engine is about to give up. What happens to inflation then? What happens to commodities if US economy plunges into a deep recession? China and India’s demand for commodities will evaporate overnight as those economies are dependent on US economy.

Then finally the question is one and simple. What is the probability that the US economy will fall into recession? The answer lies with the real estate market. The real estate market may not collapse so easily. The lumber futures market is predicting a sustained bull market in real estate construction.

It seems the wisest thing at this stage is to stay put and watch the economy as it plays out. If the economy accelerates upward, the bond market is in trouble. If the economy starts showing signs of a recession, the bond yields will collapse and the bond market will skyrocket.

Can long bond yield move towards 3%? What happens if the economy plunges into depression and deflation?
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