This Must Be Bill Gross's favourite Deflation Chart

Buying a 10-year U.S. bond for just 3.42% seems like a raw deal right now to many investors, given the potential for future U.S. inflation and dollar weakness to eat away at the value of these bonds’ principal by the time they mature.

Still, U.S. treasuries could be the best deal they’ve been in over 10 years, according to Econompic.

While the 10-year treasury’s nominal yield appears low, the real yield is much higher than it’s been in a very long time. Note that real yield, here, is calculated as nominal yield minus the recent consumer price index (CPI) change.

Real Bond Yields

The problem with this analysis is that the CPI could very well rise over the course of the next 10 years, reducing the real yield treasuries actually end up delivering. This is surely what many potential investors worry about.

Yet Econompic’s latest graphic makes a constructive point – if inflation doesn’t pick up like some market participants expect, then U.S. treasuries could be a great deal right now. Especially if the consensus weak-dollar view is proven wrong as well.

Mild future inflation (or deflation), plus some dollar strength, would make today’s long-dated Treasury buyers look very smart, notably Bill Gross.

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