Are Interest Rates Turning Up?
By Carl Swenlin, Decision Point
Based upon very long-term charts and commentary from Hoisington Investment Management Company, for some time we have speculated that the 30-year bond rate would continue downward to around 2%. However, the charts are showing strong technical evidence that interest rates may be turning up in the long term.
The monthly chart below shows bond rates going back to 1948, at which time long bond rates were about 2%. After the 1981 peak, rates have trended downward toward, we assumed, the historical low. Now it appears that the bottom is in and that rates are heading higher.
Note that the monthly PMO has turned up from its second most oversold level in 50 years, and has crossed up through its 10-EMA, rendering a PMO buy signal.
Zooming in on a 23-year monthly chart we can see a long-term double bottom (2008 and 2012). This compares with the lower PMO low, which sets up a reversal divergence (bullish). We can also see that yield has broken above a declining tops line drawn from the 2011 top, confirming the double bottom. The most important thing that needs to happen next is for yield to break above the declining tops line drawn from the 1994 top.
Conclusion: To answer the question raised in the title of this article, yes, we think that interest rates are making a long-term turn to the upside. The long-term double bottom in yield, plus the monthly PMO bottom and upside crossover are very significant events, indicating that a long-term bottom is in place. If rates do continue to rise, that will have an extremely negative effect on just about everything.
23 Comments
Vt is the unknown (but the currency-deposit ratio is falling). Wouldn’t take much of an increase in money’s turnover to lower bond prices (at least until July).
Flow5, I disagree.. currency-deposit ratio is a sublime measure of of the phitzer valve fluctuation that the HENRY paradigm shows the anomaly in the frictional summation. I do appreciate your guidance currency-depositropasi, However, I think it mis-guided because of pre disposed
Malarkey.. NO? ( I have all ways wanted to say that inane ignorant s verbarating exclation… NO :}
Cowpoke, now “that is knee slappin funny!” Ha!
Cowjoke:
The currency-deposit ratio shifts as the economy shifts. The essence of our managed-currency system, is a system in which the volume of currency in circulation is impersonally determined by the total effective demands of the public or the amount which meets most closely the needs of trade.
The basic process by which currency is put into & taken out of circulation is through the banking system. The volume of currency held by the public needs no formal or specific regulation since it is impossible for the public to acquire more of a given type of currency wiout giving up other types of currency or else bank deposits.
In other words, under our managed system it is impossible for the public to add to the total money supply consequent to increasing its holdings of currency.
Changes in the currency-deposit ratio reflect corresponding changes in the attitudes & behavior of consumers.
The demand for currency has increased during the Great-Recession because of the opportunity cost between low interest rate returns, vs holding cash, fell. At some point in the recovery (when interest rates have bottomed or have nearly bottomed), an increase in currency held by the non-bank public is indicative of a higher level of economic activity (or an increase in the transactions velocity of money).
The Underground Economy or too, illegal activity in the Black Market – where record-keeping & taxes are deliberately avoided (estimated c. 9% of gDp), reflects increases/decreases in the demand for currency.
This metric is more sensitive to changes in Vt – more so than an expnansion in our means-of-payment money. And these figures are reported weekly.
E.g., juncture recognition gave you a sell signal on July 21st 2011 (when stocks peaked), etc.
“I bought more long-term Treasuries in the last month than I’ve bought in four years. I am a fan of Treasuries now. I wasn’t a fan of Treasuries in July,” said Gundlach, chief investment officer and chief executive officer of DoubleLine Capital.
What makes anyone think the 32 year trend won’t continue until the 30 year yield hits the zero bound, or just stays flat for 10 years below 2% before turning up? The graph had lots of short term wiggles in the past, but the big trend of dropping rates remained intact since 1981. And the last time T rates were at bottom, they were held at bottom for a decade before being allowed to rise after WW II. The turn in rates to the upside could be very slow, even if it has already started. Remember, the Federal Reserve is the Treasury’s banker, and rates will be artificially suppressed to finance the government at affordable rates, just as was done during WW II.
I agree. This is one of those situations where TA doesn’t apply: a completely manipulated “market”.
The Treasury “market” has always been manipulated in the sense that the Fed has always controlled short rates, and long rates are ultimately a function of short rates. The real question is when will the Fed start manipulating rates higher? The answer is not any time soon. However, it might be sooner than the market currently expects if the unemployment rate continues to drop by .2% per month
I should clarify my statement above. The Fed hasn’t “always” controlled short rates. For example, Volker let them float in the 1970′s, but I doubt that will happen again!
“Volker let them float”
Paul Volcker’s version of monetarism (along with credit controls: the Emergency Credit Controls program of March 14, 1980), was limited to Feb, Mar, & Apr of 1980. Even with the intro of the DIDMCA, total legal reserves increased at a 17% annual rate of change, & M1 exploded at a 20% annual rate (until 1980 years’-end).
Why did Volcker fail? This was due to Volcker’s operating procedure. Volcker targeted non-borrowed reserves when at times 10 percent of all reserves were borrowed. One dollar of borrowed reserves provides the same legal-economic base for the expansion of money as one dollar of non-borrowed reserves. The fact that advances had to be repaid in 15 days was immaterial. A new advance could be obtained, or the borrowing bank replaced by other borrowing banks.
It was before the discount rate was made a penalty rate. And the fed funds “bracket racket” was simply widened, not eliminated. Monetarism actually has never been tried.
Then came the “time bomb”, the widespread introduction of ATS, NOW, & MMMF accounts at 1980 year end — which vastly accelerated the transactions velocity of money (all the demand drafts drawn on these accounts cleared thru demand deposits (DDs) – except those drawn on Mutual Savings Banks (MSBs), interbank, & the U.S. government).
This propelled nominal gNp to 19.2% in the 1st qtr 1981, the FFR to 22%, & AAA Corporates to 15.49%.
By the first qtr of 1981, the damage had already been done. But Volcker errored again (supplied an excessive volume of legal reserves to the banking system), in late 1982-83.
“the Fed has always controlled short rates”
Net changes in Reserve Bank credit (since the Treasury/Federal Reserve Accord of 1951) are determined by the policy actions of the Federal Reserve.
However, William McChesney Martin, Jr. changed policy – from using a “net free” or borrowed reserve approach – to the Fed Funds “Bracket Racket” c. 1965.
M2 is increasing but velocity of money is still decreasing. Zero possibility of higher rates in this (still deflationary) scenario. I agree with Gundlach, the long 30+ & long gold strategy that worked perfectly in the past will have the last hurrah in the second part of this year.
“velocity of money is still decreasing”
Vi = nominal-gDp/M Vi is a contrived figure. Inflation analysis cannot be limited to the volume of wages & salaries spent (as income velocity by definition does). To do so is to overlook the principal “engine” of inflation – which is of course, the volume of credit (new money) created by the Reserve & the commercial banks, plus the expenditure rate (velocity) of these funds. Also, e.g., overlooked is the effect of the expenditure of the savings of the non-bank public on prices (dis-savings). MVt encompasses the total effect of all these monetary flows (MVt).
Vt is money actually exchanging hands. Velocity is more important than any of the M’s. Vt fluctuated 2.5 times as widely during a 50 year period.
Since the PMO indicator made a new low in 2012 but yield did not make a new low in 2012, orthodox technical analysis would interpret that as CONFIRMATION of the trend — yield should go lower. That is not a “reversal divergence.” (Look up “divergence” in Investopedia.)
Based on the long-term chart, when PMO goes to extremes, there has always been some retracement, but the secular trend changed only once, and that took four years to unfold, from 1980 to 1984.
Just one simple sentence used so many times during last few years: “Do not fight the Fed!!!!”
Yeah, don’t fight the Fed. Which Fed do you mean?
The one that has always and forever failed in using the levers of monetary policy to try and avoid financial and economic meltdowns?
You may want to do two things:
1) Analyze yourself objectively and determine if your more intelligent and more successful than Michael Burry – if you answer “no” to both, proceed to step number 2;
2) Read/listen to what Michael Burry has to write/say about “fighting the fed.”
Good luck on putting your investment eggs in the fed’s capability/competency basket!
Which Fed – our, the federal reserve of the US. Are there any other?
I do not know what Burry said about price of 30Y US bonds, honestly speaking. Should i bother googling it?
What I meant is as far as the Fed keeps buying $85b in LT bonds & paper per month, and keeps st rate at zero, under current “sluggish” ecomomy, the trends of LT yields going down remains unbrocken.
I do not really see how the fed competency effects this trend. It also does not mean I approve of what they are doing. I just stated what I stated. If you think it is wrong, then, please, provide some concrete agruments. I would really appreciate it.
effective funds rate @ .16% on Friday (counts as 3 days). Should fall with POMOs of the buying type except when inflation expectations have passed an inflection point. Should fall after alternating bank squaring day (& after any regular bank squaring day).
http://www.newyorkfed.org/markets/omo/dmm/fedfundsdata.cfm
+ currency-deposit ratio signals higher turnover to support “needs of trade”. FDIC expanded insurance coverage expired = (+ Vt)
seasonal’s should be pointing down but bonds are falling against the yearly trend (signals weakness)
2 yr roc in MVt doesn’t fall until July (proxy for inflation). 24 month average roc in MVt (proxy for bonds) doesn’t fall until July
Fed needs to monetize debt to engineer recovery. It has to monetize a substantial part of total debt, public + private. That tells you enough about where interest rates are headed: zero.
It all follows naturally from a single, simple maxim: debt overhangs as a result of past asset bubbles confer disinflationary pressure on consumer prices. To get rid of the deflation, they have to monetize.
I could see an argument if you were claiming the Fed was monetizing a small fraction of the public debt (say about 10%). I’m not convinced that’s actually true, but I could see an argument for that. I don’t see how they are monetizing private debt at all… unless you’re claiming that through buying MBSs they are somehow swapping good assets (reserves) for poor assets. What is your argument?
Until people start pricing in the inflationary results of course. But by that time you’ve got some serious capital flight on your hands.
“If rates do continue to rise, that will have an extremely negative effect on just about everything.”
No overstatement.
This analysis would much more useful if it suggesting to where yield has a probability of going in the “long term.” That is, if rates on the 10-year turn higher from ~1.53% (July 2012) but only get to ~2.5% before being “reined in” – that is a big difference from some sort of long term reversion to a 50 year mean.
Over weighted in TBT…