The Duration Paradox

The Amphora Report

  • Print



It is commonly held by setting only short-term interest-rates central banks leave bond yields for the free market to determine. While mostly true under normal conditions, there are situations in which this is clearly not the case, for example, when the central bank becomes a large buyer of longer-dated bonds. As such, it is claimed by some that the US Fed is currently holding US bond yields below the level at which a free market would place them. While Fed bond buying almost certainly has some impact there are more subtle indirect ways in which a central bank can influence bond yields. One of these, the Duration Paradox comes into effect in an unusually low interest rate environment such as that we find ourselves in today. But if yields do not properly compensate investors for the risk of holding government bondsin an environment of soaring government deficits and money supply they need to look elsewhere. Historically precious metals and various other real assets have provided the preferred alternatives.


We previously tackled the topic of low bond yields amidst evidence of rising inflationary pressures in The New Conundrum of Low Treasury Yields, Amphora Report Vol 1/7, July 2010. Our explanation for why bond yields were so low at that time was twofold: first, that much demand for Treasury bonds comes from sources that buy bonds as a matter of economic policy, rather than as a rational investment decision; and second, that the Fed was beginning to talk yields down around that time by raising expectations for another round of Treasury bond monetisation, subsequently announced in early November last year and now known as QE2 (for ‘quantitative easing round two’).

Amphora Report, Mar 2011 (Click "Fullscreen" to view the report below) 

CLICK HERE to subscribe to the free weekly Best of Financial Sense Newsletter .

About John Butler