June 1st, 2018 by Kurt L. Smith
When it comes to interest rates you know we rejected the “lower rates for longer” mantra from the beginning. Largely this was due to the fact that we believed interest rates were bottoming and the new long-term trend of ever increasing rates, which we called in November 2012, was just beginning.
The chart below details significant interest rates over the past five-plus years of our journey. Longer-term rates on ten year and thirty year notes and bonds challenged our premise briefly in 2016, allowing the “lower rates for longer” mantra to swell, but the results, or shall I say, performance, speaks for itself.
All-Time Low Yield June 2017 Low Recent High
0.14% 9/20/11 1.26% 6/2/17 2.60% 5/17/18
0.53% 7/25/12 1.67% 6/14/17 2.95% 5/17/18
1.32% 7/6/16 2.10% 6/14/17 3.13% 5/18/18
2.09% 7/11/16 2.68% 6/26/17 3.26% 5/18/18
-Source: Bloomberg
Owners of ten year US Treasuries in July 2016 have watched the yield on their note increase an astonishing 181 basis points, for a 13 percent price decline in the note’s value (vis-à-vis the Treasury 1.625% 5/15/26). For owners of the bellwether thirty year bond, the 117 basis point increase in yield has lowered the bond’s value about 23 percent (vis-à-vis the Treasury 2.50% 5/15/46). All treasury prices per Bloomberg.
Double digit loses in longer-term treasury prices over the past two years are huge. Yet even at the most recent high yields lately of 2.60% to 3.26%, they continue to look low by historical standards. With double digit price damage occurring at what many folks consider “low yields,” it should prepare bond investors for continued and greater carnage as yields continue their (so far) slow movement to more “normal” interest rates. (more…)