Real 10-Yr Treasury Rate Virtually Unchanged in August

The real 10-year treasury rate was 1.71 percent in August 2015. The real rate was just 3 basis points lower than it was last month, which put an end to the streak of the rate increasing the previous six months. So, this was the second highest the real 10-year treasury rate has been since April 2011. Also, this was the fourth month in a row that the year-over-year change in the real rate was positive. In August, 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 is just 0.20 percent (and that's the highest rate of annual inflation since December 2014) versus a historical average of 4.13 percent. 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. But, at yesterday's meeting the Fed decided to keep rates unchanged. In fact, one Fed member thought the overnight rate would be negative before the end of the year. 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.