Economic News Blog
Posted by: Steven Kline, Jr. 16. October 2015

Real 10-Yr Treasury Rate Highest since February 2011

The real 10-year treasury rate was 1.86 percent in September 2015. The real rate was 15 basis points higher than it was last month. This was the highest the real 10-year treasury rate has been since February 2011. Also, this was the fifth month in a row that the year-over-year change in the real rate was positive and the eight month in a row that it has increased. In September, the change in the real rate was the highest it has been since April 2014. 

The nominal rate is still only about a third of its historical average. However, inflation is historically low. The current annual average inflation dipped back into negative territory (-0.04 percent) in September. That's the fifth time in eight months the annual inflation rate has been negative. Therefore, the real rate is about two-thirds of its historical average. Low inflation is keeping real rates relatively higher than in the past (remember, the real rate is the nominal rate minus inflation).

For months the Fed has indicated a desire to raise interest rates. With official inflation remaining so low and sometimes negative, it's hard to imagine the Federal Reserve raising interest rates. In fact, some are starting to suggest that rates will be negative or QE4 will be launched before the Fed raises rates again.

The 10-year treasury rate is good leading indicator of the money supply, 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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