-- TAKEN FROM: 09-21-18 Global Macro Monitor - "The Gathering Storm In The Treasury Market" --

Why Haven’t U.S. Long-Term Interest Rates Spiked?

Treasury_Real Yields

Good question.

Real long-term interest rates continue to hover around zero percent, which seems absurd to us, given nominal GDP growth is running at over 6 percent.

Prior to the Great Financial Crisis (GFC) the effective real interest rate on the 10-year Treasury note, measured with CPI inflation, average 2.71 percent from 1962-2008 compared to 0.85 percent during the last ten years,  2008-2018.  We estimate the real rate at 0.16 percent at the end of August.

Treasury_Nominal GDP Growth_Treasury Bond Yield

The Bond Vigilante Model suggests that the 10-year Treasury bond yield tends to trade around the growth rate in nominal GDP on a y/y basis. It has been trading consistently below nominal GDP growth since mid-2010. The current spread is among the widest since then, with nominal GDP growing 5.4% while the bond yield is around 3.00%.  – Ed Yardeni, August 2nd 

Several structural factors have been distorting a “more correct” equilibrium long-term risk-free interest rate — if one exists at all —  which are now beginning to fade.

We counsel patience.  The train has left the station.  Interest rates are on the move.