Real 10-Yr Treasury at Highest Level since February 2011

The real 10-year treasury rate was 1.88 percent in October 2015. The real rate was just 2 basis points higher than it was last month, but this was the highest the real rate has been since February 2011. Also, this was the sixth month in a row that the year-over-year change in the real rate was positive and the ninth month in a row that it has increased. In October, the change in the real rate was the highest it has been since January 2014. 

The nominal rate has fallen the last four months and is still less than one third of its historical average. However, inflation is historically low. The current annual average inflation moved back into positive territory in October but was still quite low at just 0.17 percent. However, five times in the last nine months the annual inflation rate has been negative. Therefore, the real rate is more than 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: 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.