The 30-year yield closed at 3.91% today, in a massive compression of the yield curve, a movement that has a lot of room left to run. Way back on August 8th (day 4 of this blog), I wrote the following in “That crazy, crazy bond market: a call for sub-3% long bonds”:

I predict that the dollar rally will strengthen the compression of Treasury yields at all ends of the curb, as the market perceives a lower currency risk. This is a sign of deflation: an increasing preference for cash. With the banking system on the verge of a collapse worse than the ’30s, people will have no choice but to buy Treasuries. These promises of an insolvent and unrepentant debtor are safer than cash in the bank (because its not really in the bank!).

This flight to safety will send short-term yields back under 1% (as they were in March), and traders will move out the yield curve to get ahead of the compression, driving long bonds to historic lows, likely well under 3%. …

So it may seem crazy, but it is entirely possible (and given the banking crisis, likely) that long Treasury yields will fall to 60 year records in the face of horrible fundamentals. But once they get there, I expect them to turn up and keep going, as the government starts to default by Fed printing.

To all those who feel that the US debt just DESERVES to be shorted, I say wait. It will get more deserving.

That post is worth another look, if only for the charts of the last top in Treasuries, the 1940s, when long yields hovered under 3% while inflation breached 10%.

There has been a lot of talk of a widening yield curve lately, and more than a couple of people have mentioned to me that they were thinking of shorting TLT or buying a short Treasury ETF. This actually furthered my conviction that despite the HUGE deficits that the US gov’t has started to run, that bonds were still a buy, or at least not yet a short, as no market tops out in room full of bears. Well, the premature shorts had another rough day, as we all were reminded again that this is a deflationary panic, and that Treasuries are the only things that go up in these little episodes.

Markets don’t have to make fundamental sense. They only sometimes do, in the sense that a stopped clock is right twice a day.