With the steepest global yield curve in history it appeared in mid 2009 as though we were going to go on the credit binge to end all credit binges. We were going to see inflation of eight gazillion percent and gold was headed to $50,000 as we went back to the gold standard. As we now know that is not what happened. Instead banks bought Treasuries and there has been a massive contraction in lending as borrowing. Instead of massive amounts of real growth the record steep yield curve instead brought with it a credit contraction that appears to be slowly but steadily sapping the energy from this so-called recovery.
Looking at the global GDP weighted yield curve right now you can see that since April of 2010 long term government rates have been steadily coming down as the short term rates are close to zero percent in many developed nations, which of course make up the bulk of a GDP weighted yield curve.
Global GDP Weighted Yield Curve
What is obvious to us when looking at this chart is that we are in a slow to negative growth environment for the foreseeable future. We see this in both the economic data as well as in the markets themselves with stocks showing increased volatility and bond yields of all maturities hitting new lows or close to near lows. Until we start to see signs of real growth we expect the curve to continue to flatten, primarily on the long end. One potential trade to take advantage of declining long bond yields is to either buy the long bond or buy TLT the 20+ year Treasury ETF. While we expect pullbacks and corrections, we expect long term Treasuries to continue to do well as an investment over the coming several months and maybe even the next few years. Yes, yields are low but they can go lower.
Disclaimer-In our model portfolio we are long TLT