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What goes down, may just stay down

04062019_US interest rates

What goes down, may just stay down

For over a decade the debate around US interest rates has been around when they would finally rise again, rather than if. Now that sense of inevitability is being shaken hard, or at least pushed out indefinitely once more.

After peaking in the mid-teens back in the early 1980s, interest rates on US 10-year government bonds had been on a long-term downward trend for decades leading into the financial crisis of 2008 and 2009.

US 10-Year Treasury bond yield over the past 50 years

Screen Shot 2019-06-04 at 10.16.35 am

Source: Bloomberg

At around this time the US Federal Reserve threw all its might at loosening monetary conditions to support the US economy by dropping policy rates and buying bonds. Interest rates fell further and at the end of 2008 the 10-year government bond rate hovered near 2 per cent. As the Fed’s balance sheet ballooned the 2 per cent level had become the “new normal” just a few years later.

US 10-Year Treasury bond yield since 2007

Screen Shot 2019-06-04 at 10.17.10 amSource: Bloomberg

Ever since, as US financial conditions and economic output have recovered, albeit tepidly, many commentators and analysts have been calling for a rebound in long-term interest rates. After all they can’t stay low forever. There have been some false starts.

In 2013, long bond rates rose from around 1.5 per cent up to 3 per cent, only to slide back down to that starting point in a 3-year round-trip. Then in mid-2016 interest rates bounced again. As the Fed picked up the Fed Funds policy rate from virtually zero up to 2.25-2.5 per cent and allowed its stock of bonds to roll off, the 10-year yield rose too, and breached 3 per cent last year. That’s all changed now.

The Fed has reversed its previous strict course on raising rates and allowing its balance sheet to shrink. At the same time inflation has weakened over the last year. Moreover, there are now clear and present dangers to the US economy considering President Trump’s hard-line stance on trade.

Year-over-year change in US CPI for the last 12 months

Screen Shot 2019-06-04 at 10.17.55 am

Source: Bloomberg

Recent months have seen Trump shut the door on a trade deal with China, increase tariffs on their exports to the US, and impose punitive measures to restrict the progress of a Chinese national corporate and technology champion in Huawei. It doesn’t end with China. In an effort to stop mass immigration from Mexico to the US Trump has decided to levy tariffs on its southern trading partner. And just days ago Trump decided to remove India’s special trade status that exempted the country from US tariffs on billions of dollars of products.

Markets have started to question the potential fallout for the US economy. These developments have sent investors back into the relative safety of US long-term bonds. And the yield on these securities has accelerated downwards. After peaking its head above 3.2 per cent late last year, the 10-year interest rate is only just above 2 per cent today. In March around 40 basis points (a basis point is 1/100thof a percentage point) was erased, and last month the yield recorded a similar step down.

US 10-Year Treasury bond yield over the last year

Screen Shot 2019-06-04 at 10.18.30 am

Source: Bloomberg

It wouldn’t be surprising if lower rates are here to stay, for even longer than anyone would have thought over a decade ago.


Christopher is a Portfolio Manager for the Montaka funds and the Montgomery Global funds. He joined MGIM at establishment in 2015.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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  1. You say that interest rates cannot stay low forever, but is that really the case? Thomas Picketty, in his book Capital, points out that high inflation historically is largely a 20th-century phenomenon, and the 20th century was unusual because of enormous population growth, billions moving out of poverty, and two world wars. The 18th and 19th century did not have inflation anywhere near that of the 20th. In my opinion, when people say that we have historically low interest rates, they are only comparing the current era to the 20th century and are not looking back far enough. Maybe low inflation and low interest rates are the old normal, not just the new normal.

    • Thanks for sharing your observation. I think it is quite true.

      I remember reading something that talks about the availability of credit largely depend on how confident the lender is, to the future…

      Would like to get some insight from the Montgomery team and other contributors on my observation:

      18th/19th: Less appetite to borrow and/or spend future money. No investments.
      20th: A surge in borrowing but limited credit, and hence the high interest.
      21st: Plenty of credit from Sovereign, Corporates, and individuals, lenders (and savers) are confident with the future and hence ask for less interest.

      • Another relevant factor is a comparison of the late 19th century/early 20th to the current period in terms of technology. That period had the automobile, telephone and electricity causing consistent declines in the cost of doing business and cost of goods sold. As a result inflation was low for decades and the yield curve was often inverted without being followed by a recession.

        Today we have the internet and globalisation spreading deflation rapidly, and AI and blockchain on the horizon. I think inflation will be low for a long time and we will see a lot more “yield curve panics” which will turn out to be buying opportunities.

  2. lloyd taylor

    The conclusion “lower for longer” (or should that be be “forever?” … at least as far as the eye can see) seems to me to be inevitable.

    The accrued mountain of debt in western economies, the result of almost 40 years of declining interest rates, has effectively consumed the future.

    The future is now here and and the debt mountain can only be sustained, not increased by negative real interest rates.

    This leaves no scope for further debt fired economic expansion/growth.

    Well done central bankers! These slavish adherents to a simplistic economic orthodoxy have painted the world into a stagnant corner from which there is no easy, and certainly not painless escape.

    I believe we only have to look to Japan of the last thirty years for the what the future looks like.

    I am reminded of the Vapors 1980 hit “Turning Japanese”

    A new anthem for the western world…” I’m turning Japanese, I think I’m turning Japanese, I really think so…”

    And the future investment corollary of all this?

    All the best

    • andrew ronan

      On the japanafucation of the world, I think there is a vast difference between japans last 30 years of no growth and what we are headed into (japanafucation), that being that Japan had the rest of the worlds massive credit driven boom time growth to prop it up through its no growth decades, the question is, what will prop the entire world up when we are all in full japanafucation, maybe the almighty MMT, but that hasn’t worked this last decade, there seems to be nothing else out there except very dark clouds.

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