The articles that Mully posted in response to my earlier post on interest rates not going up were very interesting to me. In particular this chart:
Now about the article and the chart, which only appears to have an annual update, which I think may be enough when investing for long term trends:
1) It was written in June 2013 as a means to warn of low interest rates and the upcoming rise in the 10 year treasury back to 4 percent. The 10 year rate was about 2.2% at this point and since has fallen to 1.55%. However in short order the 10 year rate did move swiftly to 2.9% just over the 50 month average before falling back again. Despite what the article states at the time it was published the 50 month average was 2.67% not 4%. However the average contained the advance as it did a similar advance in August 2013 and the mini advance in December of 2015 from which we have had an acceleration down in rates.
2) It is a 50 month moving average of the 10 year treasury rate and since 1926 the 10 year rate has only changed it’s primary trend twice! This is an amazing amount of directional control maintained by the Central Banks. The predictable nature of interest rate moves makes decisions in the financial industry much easier and helps contain unexpected losses.
3) The chart is informative because it holds the net actions of the FED and investors. Swift up moves away from the average inevitably is leading to calls to action by authorities which moves interest rates back into control by usually overdoing the action, low interest rates have been met with slow gradual increases with the exception of 1836 when the Bank of England announced it expected to raise interest rates from 3 to 5 percent which then led to the panic of 1837 and continued financial turmoil into the 1840’s.
Until one would see a directional trend in the 10 year treasury rate and the 50 month moving average I think expecting a move above it because of economic factors is ignoring the counterbalancing control Central Banks are exerting to preserve an economic system that relies on favorable outcomes for the financial sector. Right now the largest holders of US government debt are banks, insurance companies and Central Banks. It is against their interest to allow rates to rise very much. Increases I think will be small unless the Central Banks lose control as was the case in the late 70’s and early 80’s. Large moves have been to come either back to the trend or else a move in the current trend away from the average. More likely is the Fed to gradually allow interest rates to rise, causing a slow change in trend direction to the upside, equally possible is an onset of a new recession and interest rates could take a plunge to negative territory, something Central Banks are now willing to do that was not conceived possible through most of history.
