Economic News Blog
Posted by: Steven Kline, Jr. 15. December 2015

Real 10-Yr Treasury Rate Climbs above 2%

The real 10-year treasury rate was 2.14 percent in November 2015. This was the first time the real rate has been above 2 percent since February 2011 and the highest the real rate has been since June 2010. Also, this was the seventh month in a row that the year-over-year change in the real rate was more positive and the 10th month in a row that the change has increased. At 149 basis points, the year-over-year change in the real rate was at its highest rate since December 2013.

The nominal rate increased for the first time since June. And, while inflation was still historically low, the annual rate of inflation reached its highest level since December 2014. The increase in the rate of inflation helped temper the rise in the nominal rate as the real rate is the nominal rate minus inflation.

For months the Fed has indicated a desire to raise interest rates. However, the first paragraph above shows that the market has already been raising rates on its. In fact, the real Fed funds rate, which is the rate directly controlled by the Fed, has increased the last 12 months. It was 0 in November, which was the first month the real Fed funds rate wasn't negative since February 2010. So, if the Fed raises rates, then it will be late to reacting to what the market has already been doing for some time. 

The 10-year treasury rate is good leading indicator of the money supply, housing permits, consutrction spending, and consumer durable goods spending. Currently, the  change in the real rate isa negative indicator. Interest rate changes tend to lead these data points by 12-15 months. Therefore, we should expect to see decelerating growth in these data points begin (or continue) soon. 

The real Fed funds rate is an important leading indicator for the following industries: appliancesautomotivecustom processorsfurniture manufacturinghardwareHVACmetalcutting job shopsoff-road/construction machinerypetrochemical processorsplastics/rubberpumps/valves/plumbing productstextiles/clothing/leather goods; and wood/paper.

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