Those reporting reporting all-time lows in Treasury yields need a little history lesson. Let’s take a quick look at the bond market first. For those who know how to read it, its behavior is ominous.

Click image for sharper view. Source: Bloomberg.

This deflation is so strong that investors are lending money to the government at long-term rates that would guarantee a loss if the notes are held to maturity. The government is clearly broke, with $70-100 trillion in liabilities (including entitlements), but because credit is imploding and all assets are crashing relative to cash, Treasuries are about the only sanctuary right now. When banks aren’t safe, your choice is either your mattress or Treasuries (wait for gold to approach $600 before adding it to the list - too many inflationists need to bug out of it first).

These are not all-time lows in yield, as some are reporting. Interest rates last bottomed in the 1940s, with a compendium of 10-30 year Treasury rates holding well beneath 3%:

Here is a close-up of the bottom for yields (yes, they touched 2%):

Source: St Louis Fed.

Treasuries clearly remain in their 27 year-old bull market, and with deflation raging, there is a strong case for another visit to the levels of the 1940s. Here’s the 30-year yield:

Click image for sharper view. Source: Yahoo! Finance.

Just as this credit implosion is great for the longs right now, the market is setting up bond shorts for the mother of all opportunities. But they need to be patient and aim well out ahead of the curve. Those who shorted bonds at under 3% in 1935 would have been underwater for 20 years, even though deficits soared and inflation raged in the 1940s.

As desperately broke as the government now is, and as weak as the tax base is becoming, I suspect that this time it will take considerably less than the 35+ years it took for rates to last swing from 3% to 14%, but speculators buying inverse bond funds (such as TBT) for anything but a quick trade should be prepared for a very long wait.

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PS — For a hint as to where the Fed is going today, take a glance at the 3-month T-bill. The Fed tends to follow the market.