Valuing bonds, dollar is crazy in mad world

Not anymore. The ad-hoc combination of quantitative easing, government stimulus packages and zero-interest-rate policies has distorted markets beyond recognition.

In short, it is almost impossible to make a coherent argument for what a 10-year Treasury should yield, what a dollar or euro is worth, or whether to buy or sell copper or gold. Following are examples of markets driven mad by the recent enthusiasm for government intervention.

Unshackled from Bondage, Unhinged from Reality

The 10-year U.S. government bond yields about 3.5 percent, down from a five-year average of 4.14 percent and its 20-year average of 5.57 percent. Today's level, though, is about as reliable as the price of a collateralized-debt obligation in the depths of the credit crunch.

The combination of U.S. authorities keeping the fixed- income market on life support by buying debt, plus commercial banks filling their balance-sheet holes with top-quality government securities, makes the Treasury yield an exercise in marking-to-myth.

With bonds as your guide, you would never guess that the U.S. Treasury plans to borrow a net US$276 billion for the October-December period and a further US$478 billion in the first quarter of next year, or that it expects to hit its US$12.1 trillion debt ceiling some time next month.

If anyone is worried that the multi-trillion-dollar global Keynesian experiment we're in the middle of might backfire and ignite inflation, they haven't told the Treasury market. Maybe they have been whispering instead to the gold market. Gold has reached a record US$1,095 per ounce this week after a 25 percent gain so far this year. You know markets have gone mad when the 10-year Treasury couldn't care less that gold is at a record.

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