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What do interest rate cycles of the past say about rates today?
CNBC recently interviewed noted Wall Street technical analyst Louise Yamada and asked her that same question. If you’re a chart and market history geek, her answers will be of interest:
On the length of cycles
- Interest rate cycles have typically lasted for decades, from 22 to 37 years.
- “The reversals from rising rate cycles to falling rate cycles” have occurred very quickly. You can spot their inverted ‘V’ pattern, as in 1980/81.
- By contrast, “The reversals from falling interest rate cycles to rising interest rate cycles have been very slow, multi-year affairs (lasting) from 2 to 14 years. We think that is because each of them has experienced some kind of deflationary pressure.”
- Looking at what’s been happening over the last 6-8 years with interest rates, Louise adds, “We think now that the 2012 low probably is going to prove to be the low just as 1946 proved to be the low in the last cycle. It wasn’t until 1951 that you put in place the higher low.”
On what’s happening today
- “We’re looking at the formation, we think, of the higher low here and the [benchmark U.S.] 10-year note…would have to put in place a slightly higher high to define the real technical evidence of a reversal…that would also penetrate the 1980 downtrend and that would be about 3.00%.”
- She’s watching that 3.00% level like a hawk because “that will be the ultimate level that we can definitively say that rates have reversed. …We may see that over the next few years,” she predicts. “It may not be tomorrow. It took five years before we saw the higher low after 1946.”
- “I suspect rates will go up at a moderate pace and once we get through 3.00% we can define the next rising interest rate cycle.”
- “I think it’s difficult to argue you’ll go back lower below the 2016 low.”
Source: CNBC
The Spy’s Take
- You know how we hate making rate predictions, but one thing’s for sure: despite all the “lower for longer” market psychology and long-term disinflationary trends out there, it would be downright foolish to suggest that rates could never rise substantially.
- But Yamada reminds us that big turns take time. We’re hearing story after story about how Trump will re-energize the U.S. economy, push up inflation and borrowing demand and take rates higher. But legislative wheels turn slow, and stimulus can take a long time to generate meaningful growth.
- Given that Canada:
- has its own economic problems
- will benefit from Trump stimulus only indirectly, and
- faces risks from Trump’s trade and tax policy…
….rates on this side of the border could remain historically low for multiple quarters.
But for the first time in decades, it’s not crazy to believe that rates may no longer be in a downtrend.
By Steve Huebl, RateSpy.com
7 Comments
One factor in rates is risk, and 100 years ago risk was higher. Unsecured debtors could pack up and move to escape their debts. Now we have personal property registries, reciprocal enforcement of judgements, … More ways for creditors to collect, and thereby reduce lending risk.
So a ‘normal’ interest rate 100 years ago is not normal now.
Hey Ralph, Just a point of note: This 200-year history is of secured government debt, as opposed to unsecured debt. It dates back to the Revolutionary War (late 1700s), when the U.S. Treasury started issuing loan certificates (the modern day equivalent of T-bonds).
“We think now that the 2012 low probably is going to prove to be the low just as 1946 proved to be the low in the last cycle. It wasn’t until 1951 that you put in place the higher low.”
It’s certainly shaping up that way so far. I don’t foresee mortgages rates getting any cheaper than they have been over the last few years any time soon.
Thanks for the clarification. Even for US government debt, I think the risks are much less now than they were 100+ years ago. For example, if the Confederates had won the civil war…
I do agree rates have passed a bottom, but I’m not convinced 10yr yields will rise through 3%.
While I’m not prone to believe every forecast that is thrown out concerning where rates are headed, I do take note when Louise Yamada speaks. She’s one of the best technical analysts Wall Street has ever seen. So if Ms. Yamada says we’re entering a cycle of rising rates, that’s where I’m putting my money
Tara, there have been many “experts” that have been wrong (remember Meredith Whitney?). To quote Einstein: “Unthinking respect for authority is the greatest enemy of truth.”
I’d hazard to say *most* experts are wrong most of the time. Having said that, I tend to agree with the analysis in this case. I think we’ve now passed the rate low and will see gradual rising rates over the next several years.