Whither Rates Up or Down?

Forecasting the path of interest rates is very hard; impossible, really.  That doesn’t stop talking heads from trying to do it.  Starting in the post-Credit Crisis environment of 2008/2009, most thoughts pointed to rampaging inflation and sky-rocketing interest rates in the aftermath of aggressive Fed easing and increases in the money supply.  Certainly, that has not been the case.

Interest rates and inflation continues to be muted and well under control.  The 10-year treasury is currently yielding 2.13% today and from 2009 to today has been within a range of 3.98% (April 2010) and 1.38% (July 2016); a small range with hardly a trend.   Fed Funds, on the other hand, has moved up in a telegraphed and orderly manner from about 0% from 2009 to 2016 and then up in steps to about 2.37% today.

Barron’s had a few articles on interest rates in the June 10, 2019 issue.  One article titled, “Say Goodbye to Those 2% Rates on Savings”, made a point that Wall Street thinks interest rates are going lower.  So, if you have that view, some strategies that could benefit could include to try to lock in rates, place some bets on financials (that might be more profitable in a steep yield curve environment), or buy real estate investment trusts that could broadly benefit from a general decrease in rates.

Another article titled, “The Rate Swing of a Generation” by rate guru James Grant, made the point that bonds have traded in two great long-lived markets: the bear market of 1946-1981 and the bull market from 1981-2016 (which may be extended if we get another round of rate cuts).  He is not forecasting anything; instead, he is positing that rates could rise from here.  He thinks we have an unreasonable “love” for bonds that could turn on us.  One point he makes is that “real” rates, rates after adjusting for inflation, are historically low and should not persist. 

So, no one knows and there are plenty of differing views.  Undiversified bets in either camp could cost you; best to stay diversified.