Some Long-Term Perspective On Treasury Yields

Doug Short is the vice president of research at Advisor Perspectives.

Note from dshort: The October rally in equities (the S&P 500 is up 8.23%) has been matched by the selloff in the 10-year note. The yield closed the week at 2.26, up 54 basis points from its all-time closing low of 1.72 on September 22.

Let's have a look at a long-term perspective on Treasury yields. The chart below shows the 10-Year Constant Maturity yield since 1962 along with the Federal Funds Rate (FFR) and inflation. The range has been astonishing. The stagflation that set in after the 1973 Oil Embargo was finally ended after Paul Volcker raised the FFR to 20.06%.

Now let's overlay the S&P 500 to see historical pattern of equities versus treasuries. This is a nominal chart, which significantly distorted the real value of both yields and equity prices.

Here's the same chart with the S&P 500 adjusted for inflation and the annualized inflation rate subtracted from the yields. The impact of stagflation becomes much clearer. We can better understand the severity of the decline in equities from the mid-1960s to the bottom in 1982. And we can also see why high yields can be deceptive in periods of double-digit inflation.

The most interesting series in the charts is the FFR red line. We can see how the Fed has used rate to control inflation, accelerate growth and, when needed, apply the brakes. Unfortunately, the FFR has been virtually zero since December 2008, so it is no longer available as a tool to stimulate the economy. Incidentally, I annotated the top chart with the tenures of the last three Fed chairmen so we can see who was managing the various FFR cycles since the summer of 1979.

The next chart is based on daily data and adds some additional Treasuries for a close look at yields since 2007.

I update the long-term charts each weekend and the last chart more frequently, depending on yield volatility.

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U.S. Household Incomes: A 42-Year Perspective

Doug Short is the vice president of research at Advisor Perspectives.

Earlier this year I had the privilege of speaking at the Spring Conference of the Retirement Income Industry Association (RIIA). My presentation, The Retirement Puzzle in an Age of Uncertainty, featured a PowerPoint collection of about 40 slides elaborating on various aspects of the puzzle.

Yesterday's update on disposable personal incomes reminded me of some charts on household income that I prepared for the conference, ones that I'll also be discussing in my presentation at the RIIA Fall Conference in Boston coming up in early October (I hope to see some of you there).

My data source is the Census Bureau, which publishes a quintile breakdown of data from 1967 through 2009 (see Table H.3).

The pie chart here shows that the top fifth of households in 2009 took home 50% of the nation's income. The middle fifth received 15% and bottom fifth a mere 3%.

The charts below show income growth over the complete data series. In addition to the quintiles, the Census Bureau includes the mean income for the top five percent of households.

Most people think in nominal terms, so the first chart below illustrates the current dollar values across the 42-year period. (The phrase "current dollar" is econospeak for the nominal value of a dollar at the time received — not adjusted for inflation.)

The next chart adjusts for inflation in chained 2009 dollars based on the Consumer Price Index. In other words, the incomes in earlier years have been adjusted upward to the purchasing power of the most recent year in the series.

Two things are particularly striking (but not surprising) in the inflation-adjusted chart:

Income growth has been much higher for the top quintile and particularly the top 5% (the two lowest quintiles are essentially flat).The purchasing power of 2009 incomes had shrunk to about the same levels they were a decade or more before, depending on the segment.

The lack of sustained growth in household incomes is no doubt a major factor in the general decline in consumer confidence over the past decade.

For a closer inspection of the household income data, I've also prepared charts of the nominal and real percentage growth since 1967. Here is the real version.

Among the many subtle details evident in these charts, one that especially caught my attention was the fact that the bottom quintile has grown faster than the third and fourth quintiles. This curious fact is not apparent in the dollar charts above.

Also not evident in the dollar charts is the grim reality that (in real terms) households in the bottom quintile earned less in 2009 than they did in 1989 — twenty years earlier.

I'll be updating these charts when the 2010 household income report is released later in the third quarter. Meanwhile a look at the August update on real disposable personal incomes per capita from the BEA (the red line in the chart below) suggests that the Census Bureau's 2010 report won't show a significant reversal in the ongoing trend.

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