rtmark
LearnBonds.com

US Interest Rates: A Look at the New Normal From The Bond Squad

US Interest Rates

Portfolio strategists, pundits and investment company sales people have (for years) warned investors that, eventually, interest rates will return to normal. Bond Squad does not disagree. Portfolio strategists, pundits and investment company sales people have (for years) warned investors that, eventually, interest rates will return to normal. Bond Squad does not disagree.

However, we must first determine what is normal. Investors and industry professionals who lived through the 1970s and early 1980s might consider double-digit Fed Funds Rates as normal. Younger consumers looking to purchase a home might consider 30-year mortgage rates of 4.00% as normal. Technical analysts might consider a reversion to a mean of around 6.00% for the UST 10-year note as normal.

Look back for forward interest rates

The folks over at Real Money published a chart of historical 10- year UST Rates. The data might surprise you. However, we must first determine what is normal. Investors and industry professionals who lived through the 1970s and early 1980s might consider double- digit Fed Funds Rates as normal.

US Interest Rates

Younger consumers looking to purchase a home might consider 30-year mortgage rates of 4.00% as normal. Technical analysts might consider a reversion to a mean of around 6.00% for the UST 10-year note as normal.

As you can see, as the U.S. economy matured and developed (and as the dollar became a dependable currency), long-term interest rates trended lower from 1790 to about 1902, with the 10- year UST note yield bottoming just below 3.00%. Through WWI rates moved higher as inflation pressures picked up as the U.S. economy became the Arsenal of Democracy and gold gained in popularity.

The yield of the 10-year note peaked in the neighborhood of 5.50%. This was considered a high long-term interest rate. Even as the economy boomed during the 1920s, long-term interest rates fell as inflation pressures “normalized.” As we have written many times, long-term interest rates reflect inflation expectations rather than growth expectations.

Baby Boomer break down

As we move through the Great Depression and WWII, not surprisingly, interest rates plunged. As the U.S. economy recovered, interest rates began to normalize. The yield of the 10-year UST note spiked to just under 4.00% in 1959 from about 2.00% in 1950. This was an orderly renormalization over the course of a decade.

However, everything broke down in the 1960s as consumption for and by the Baby Boomers, military spending, and spending on entitlements rocketed higher. This led to more government borrowing and when we left the gold standard in the 1970s, depreciation of the U.S. dollar. This led to soaring long-term rates based on hyper-inflation.

In the 1980s, the Fed, led by Fed Chair Paul Volcker, broke the back of inflation, leading to what Bond Squad believes to be a correction to normal interest rates. The question remains, what is normal today? Based on global demographics and greater efficiencies from technology, normal might be lower than what many “experts” believe. Not only might a normal 10-year note yield be below 6.0%, it might be below 4.00% or even below 3.00%.

Giving up on being “Normal”

What the historical data tell us is: There is no such thing as normal interest rates. Interest rates reflect inflation conditions. Inflation conditions can, but not always do, reflect growth conditions.

Thus, unless we see inflation (whether it is from consumption or currency devaluation which is similar to prior conditions) we are unlikely to see interest rates similar to prior eras. This goes for Fed policy rates as well as long- term rates. After all, if there is not much inflation to combat, the Fed does not have to raise the Fed Funds Rate very far or very quickly.

This is how Bond Squad arrives at its view that the peak Fed Funds Rate might be below 3.00%, the neutral Fed Funds Rate might be around 2.50% and the yield curve could flatten with rates two- years through ten years at or below 3.00%, at the end of the current economic cycle.

This is where technical historical models can break down. What data set should be used, the interest rate environment from 1990 to 2007? How about 1981 through 2006? Maybe 1946 through 1981? You pick to which mean interest rates might revert. We sure can’t. We believe looking back is not the answer. Yes, when viewed through the prisms of particular eras, we might get an idea of how interest rates might respond if we see history repeat.

However, we are unlikely to see another world war and a baby boom any time soon. We don’t see any cold war spending re-emerging. Although both long and short interest rates might be below normal, they might not be nearly as far away as many investors and professionals believe. In the end, normal interest rates are determined by fundamental economic conditions and not technical patterns.

Thomas Byrne brings 26 years of financial services experience to Wealth Strategies & Management LLC. He spent the last 23 years as Director of Taxable Fixed Income for Citigroup, Inc. and predecessor firms in New York, NY. During the course of his long fixed income career, Mr. Byrne was responsible for trading preferred stock, corporate bonds, mortgage backed securities, government debt, international debt and convertible bonds. Mr. Byrne was also responsible for marketing, sales, strategy and market commentary within the taxable fixed income markets.

Contact Thomas Via Email

Trusted & Regulated Stock & CFD Brokers

Rating

What we like

  • 0% Fees on Stocks
  • 5000+ Stocks, ETFs and other Markets
  • Accepts Paypal Deposits

Min Deposit

$200

Charge per Trade

Zero Commission

Rating

64 traders signed up today

Visit Now

75% of investors lose money when trading CFDs.

Available Assets

  • Total Number of Stocks & Shares5000+
  • US Stocks
  • German Stocks
  • UK Stocks
  • European
  • ETF Stocks
  • IPO
  • Funds
  • Bonds
  • Options
  • Futures
  • CFDs
  • Crypto

Charge per Trade

  • FTSE 100 Zero Commission
  • NASDAQ Zero Commission
  • DAX Zero Commission
  • Facebook Zero Commission
  • Alphabet Zero Commission
  • Tesla Zero Commission
  • Apple Zero Commission
  • Microsoft Zero Commission

Deposit Method

  • Wire Transfer
  • Credit Cards
  • Bank Account
  • Paypall
  • Skrill
  • Neteller

Rating

What we like

  • Sign up today and get $5 free
  • Fractals Available
  • Paypal Available

Min Deposit

$0

Charge per Trade

$1 to $9 PCM

Rating

Visit Now

Investing in financial markets carries risk, you have the potential to lose your total investment.

Available Assets

  • Total Number of Shares999
  • US Stocks
  • German Stocks
  • UK Stocks
  • European Stocks
  • EFTs
  • IPOs
  • Funds
  • Bonds
  • Options
  • Futures
  • CFDs
  • Crypto

Charge per Trade

  • FTSE 100 $1 - $9 per month
  • NASDAQ $1 - $9 per month
  • DAX $1 - $9 per month
  • Facebook $1 - $9 per month
  • Alphabet $1 - $9 per month
  • Telsa $1 - $9 per month
  • Apple $1 - $9 per month
  • Microsoft $1 - $9 per month

Deposit Method

  • Wire Transfer
  • Credit Cards
  • Bank Account
All trading carries risk. Views expressed are those of the writers only. Past performance is no guarantee of future results. The opinions expressed in this Site do not constitute investment advice and independent financial advice should be sought where appropriate. This website is free for you to use but we may receive commission from the companies we feature on this site.
Avatar

Thomas Byrne serves ad the Director of Fixed Income for Wealth Strategies Management LLC. Thomas brings 26 years of financial services experience to Wealth Strategies & Management LLC. He spent the last 23 years as Director of Taxable Fixed Income for Citigroup, Inc. and predecessor firms in New York, NY. During the course of his long fixed income career, Mr. Byrne was responsible for trading preferred stock, corporate bonds, mortgage backed securities, government debt, international debt and convertible bonds. Mr. Byrne was also responsible for marketing, sales, strategy and market commentary within the taxable fixed income markets. High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.