Real 10-Yr Rate Falls Below 1 Percent

(Positive) The real 10-year treasury rate was 0.96 percent in June 2016, falling below 1 percent for the first time since April 2015. Since the Fed announced it was raising its overnight rate, the real 10-year treasury rate has dropped each of the last seven months. A significant reason for this is that that the rate of inflation, while still low, has picked up from what it was in 2015. So, even though the nominal rate has not change much since February, the real rate continues to fall (the real rate is the nominal rate minus inflation). Apparently, the market does not see things the same way as the Fed. The change in the real 10-year treasury rate decreased for the sixth consecutive month. And, for the second month in a row the change in the rate was negative, meaning the rate was lower than it was one year ago.

There is really only two ways the real rate can continue to fall. One, the rate of inflation continues to increase, which would likely only be possible with QE4 (aka helicopter money), which has been in the news lately in Japan and from a speech of a Federal Reserve board member in Australia. Two, negative nominal rates. Close to 20% of the bonds in the $50 trillion global bond market have a negative nominal rate. Just three years ago, not a single bond had a negative nominal rate. 

The 10-year treasury rate is good leading indicator of the money supply, housing permits, consutrction spending, and consumer durable goods spending. A falling real interest rate should lead to more housing permits, construction spending, and consumer durable goods spending. This means that the real 10-year treasury rate is now a positive leading indicator for capital spending. 

The real 10-year treasury rate 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.