A wise man posed this question this morning  —-  given that U.S. nominal GDP growth is roughly 4%, would the U.S. Tnote yield be this low (2.5%) had central banks not been gobbling them up?    (he thinks no)

My Answer:  No, they would not.  I’ve agreed with the wise man.  If only for a few seconds.

In fact, the U.S. Tnote yield would be much lower  -not higher- had central banks not been gorging on them.  Clearly, the U.S. and much of the global economy has been kept alive via central bank balance sheet expansion.  Had this not been the case over the past year, inflation would be far lower, every economy would be in recession, stock markets would be collapsing, and ……..  the US Tnote yield would be half its current rate (or lower) as the fear trade would drive it towards where the German 10yr bund yield has been this year (1% or lower).

The bond market is of course being warped by central bankers hitting the ctrl-P button. But if you’re looking for an asset that has been wildly inflated via QE, the answer could not  be more obvious: stocks.

I suspect the U.S. Tnote yield and stock prices will not be anywhere near current levels in 12 months hence — provided the Fed sits on its hands after QE3 ends this month.