The yield on long-term Treasury bonds briefly touched a low of 6.08% last Thursday, the lowest rate of return on a long-term government bond since January 1973, and Blue Chip Economic Indicators dubbed the current recovery, now 28 months old, "the slowest in post-world War Il history."

At least there is a nice consistency there. Consumer prices in May, June, and July rose at an annual rate of only 0.8%, which makes real long-term bond yields equal to roughly 5 1/4%, relatively high when compared to other inflation-adjusted yields over the past half century. Granted that a 0.8% inflation rate is too good to be true, but prices definitely are behaving-better. As Ed Yardeni of C.J. Lawrence said last week, "Strong deflationary forces are pushing the December-to-December rate down to 2%."

Accepting a 2% annual rate of increase for consumer prices as the current inflation rate, long-term Treasury bonds with a nominal yield of 6% produce a real yield of 4%, and that's not bad. Most of the time over the past 50 years, real rates of return on fixed-income investments with no credit risk have been well below 4%, largely because rampant inflation has eaten away nominal yields. In fact, real yields on Treasury bonds have been negative in 13 years since 1940.

A look at the record over the sweep of the second half of the 20th century provides some assurance that nominal yields could easily drop below 6%. They might even decline into the 4% to 5% range, as economist Gary Shilling suggested last week.

Only beginning in 1982 have inflation-adjusted yields on Treasury bonds been generous. In 1984, the real yield on Treasury bonds hit 7.67%, when their nominal yield was 11.99% and the inflation rate was 4.32%, and that was the fattest real yield of the past half-century, a gift to bond investors from Paul Volcker.

The worst real yields occurred right after World War 11 when interest rates were controlled and inflation was wild. In 1947, bonds nominally yielded 2.25% and inflation ran at a 14.51 % annual rate, leaving hapless bond investors with a real rate of return of minus-12.26%. Harry Truman may be enjoying a resurgence in reputation nowadays, but his administrations were vile for bondholders large negative real yields in four of his seven years in office.

Every year from 1940 until 1982, Treasury bond investors received real yields of less than 31/2%. With the economic expansion as sluggish as it is and with deflationary forces as strong as they are, a return to more usual real yields seems likely.

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