Real 10-Year Rate Rises for First Time since December 2013

The real 10-year treasury rate was 0.59% in February 2015. This was the first time the real rate increased from the previous month since February 2013. And, it was the first time the real rate increase from one year ago since July 2013. The nominal rate of the 10-year treasury was still quite low in February. In fact, it was below 2% for the second month in a row, which was below the historical average of 6.4%.

The reason the change in the rate increased from one year ago is that the rate of inflation has dropped dramatically. The annual rate of inflation was negative the last two months, which hasn't happened since October 2009. With very low 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.