Curve Watchers Anonymous proudly proclaims “Treasury Bull Market Not Over” pointing out as evidence Record Low Yield at 10-Year Auction

Records Fall

The difference in yield between two- and 10-year Treasuries was 1.92 percentage points, touching the least since April 2009. A narrower yield difference, or flatter curve, indicates investors are betting on lower growth and inflation.

The 10-year note auction drew a yield of 2.140 percent, below the previous record of 2.419 percent in January 2009.

Yield Curve as of 2011-08-10

click on chart for sharper image

Only if one insists on a new lower-low in 30-year treasuries can someone cling to the fallacy the treasury bull market has ended.

QE3 Totally Useless

People are still clinging to the hope that QE3 will accomplish something. It won’t because it can’t. Yes, it’s as simple as that.

When Bernanke announced QE2 the stated purpose was to drive yields lower with a goal of increasing credit and hiring. It did neither, but it did ignite a speculative rally in the stock market.

Shades of Japan

03-Mo = .01%

06-Mo = .06%

12-Mo = .09%

02-Yr = .18%

03-Yr = .33%

05-Yr = .92%

07-Yr = 1.50%

10-Yr = 2.15%

30-Yr = 3.51%

Let’s assume Bernanke launches QE3. Where are yields going? If 3-year yields dropped to 0% would it possibly matter? Would it matter if 10-year yields fell to 1.5%? Why would it?

QE3 will not matter anymore than it did for Japan easing dozens of times at 0%. QE3 will not spur hiring, consumption, or credit.

Businesses do not want to expand. Why should they?

Here is the bottom line: There is too much debt and no way to pay it back. Efforts to get consumers to borrow and businesses to expand remain futile.

No matter how many times I have explained this, inflationists remain oblivious to the fact that in a credit-based economy it is extremely difficult to generate inflation when credit does not expand. In such environments, talk of hyperinflation is ludicrous.

Don’t look for a lasting rally if and when Bernanke does announce QE3. That announcement may ignite a 1-week wonder rally or it may cause immediate panic. Either way, the emperor has no clothes and the market at long last has caught on.

Mike “Mish” Shedlock

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