Change in 10-Yr Treasury Rises for Second Month

The real 10-year treasury rate was 0.79% in March 2015. This was the second month in a row that the real rate has risen. And, it was the second month in a row that the change in the real rate has increased. One reason that the change in the real rate has increased is that the nominal 10-year interest rate has increased the last two months. The second reason is that inflation, according to the CPI, has been negative for three straight months. This negative rate of inflation is significantly below the rate of inflation of the last five years. With very low (or negative) inflation and a rising 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 is potentially at a turning point. If it is, then this would be a negative indicator for the money supply, construction spending, and consumer durable goods spending. 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.

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.