Higher interest rates are coming. That’s the message that the investment community has heard for the better part of 18 months now. And interest rates have risen in the United States. Still, what has happened is that longer-term interest rates in the 10-year Treasury note, and even out 15 and 20 years, have remained stuck under 3%. Even the benchmark 30-year Treasury’s long bond has barely managed to get that much higher than 3%.
24/7 Wall St. was not alone in the call for higher interest rates after the Federal Reserve went to its policy of raising interest rates and removing the overly accommodative low-rate policy as it exited quantitative easing. Jamie Dimon of JPMorgan has even gone on the record of late calling for investors to prepare for higher long-term interest rates, perhaps to 4% or even 5%, in the United States. And the 3% hurdle still somehow seems to act as a wall.
There are many reasons that the bond market has not seen that 10-year note and 30-year bond get that much higher than 3%. The problem is that these issues may all get in the way of Federal Reserve Chair Powell’s ambitions to get interest rates higher and away from the accommodative policies in a post-quantitative easing stance.
Second-quarter GDP was indicated to finally be above 4%, and consumer prices are just starting to get in that 2.5% to 3.0% range. Despite the Fed presidents continuing to predict, or even warn, that they want to keep raising interest rates, this 3% yield level continues to act as a barrier.
At issue is whether 3% will act as a barrier or the Fed will dare to risk the policy of raising interest rates into what the markets fear in an inverted yield curve (where short-term or intermediate-term bond yields actually have higher yields than long-term yields). And this all points to the risks that the nine-year recovery from the Great Recession could suddenly find itself tipping back into a recession or a very slow growth environment all over again.
As of mid-August, short-term rates (under one-year) were just under 2.5%, the two-year note had a yield of 2.6%, and the five-year had a yield of about 2.75%. The yield on the 10-year Treasury was just 2.87%, and the 30-year yield was just 3.03%. Those short-term and intermediate-term yields are up a full point from the same time in 2017, but the last year’s gains in yield were only about 70 basis points higher on the 10-year Treasury and just 25 basis points higher on the 30-year Treasury.
The markets better pay attention to the major reasons that are keeping Treasury yields so much lower than many experts and forecasters have called for. These reasons also may keep the longer-dated Treasury yields lower for the rest of 2018 and even into 2019.
It’s important to keep in mind that nothing lasts forever. And there is also the theory that high prices cure high prices and low prices cure low prices. Is the same true of interest rates?
While we have identified 10 reasons keeping longer-term interest rates at or under the 3% mark, there are arguably many other reasons that could be represented, and the following are not ranked in any specific order. Markets are complicated instruments, and at the end of the day the bond, equity and commodities markets are still all intertwined and linked to each other. Again, any or all of these issues can change in very short order.
1. Global Yields Remain Handily Lower Than Expected
Whether you want to address Europe or Japan, it turns out that kicking quantitative easing and then tightening monetary policy can be much harder to effect than simply predicting it. European Central Bank President Mario Draghi has been rather late to raise rates, and the efforts to remove all the quantitative easing measures have been slower than the Europeans previously indicated.
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