Real 10-Yr Treasury Rate Increases for Third Month
The real 10-year treasury rate was 0.86% in April 2015. This was the third month in a row that the real rate has risen, and it was the highest the real 10-year treasury rate has been since September 2014. It was the third month in a row that the change in the real rate has increased. The change in the real rate also was the highest it has been since September 2014.
The nominal 10-year rate was near its lowest level since September 2014. But, the real rate and the change in the real rate have risen because the annual rate of inflation has fallen significantly. In fact, the annual rate of inflation, as measured by the CPI, has been negative for four straight months. And, April had the lowest annual rate of infation (0.2%) since September 2009. With very low (or negative) inflation and a generally stable yield, it is likely that the change in real 10-year treasury rates will continue to increase. This would be a negative sign for manufacturing. However, interest rates have quite a long lead time before they begin to affect industrial production and capital equipment spending.
The 10-year treasury rate is good leading indicator of the money supply, consutrction spending, and consumer durable goods spending. The change in the real rate has turned to a 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. Of course, this will largely depend on the Fed's decision to either raise interest rates or resume QE. Given the trend in rates, inflation, the exchange rate, and the overall economy, I find it hard to imagine that the Fed would raise rates. But, anything is possible.
The real Fed funds rate is an important leading indicator for the following industries: appliances; automotive; custom processors; furniture manufacturing; hardware; HVAC; metalcutting job shops; off-road/construction machinery; petrochemical processors; plastics/rubber; pumps/valves/plumbing products; textiles/clothing/leather goods; and wood/paper.
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