Economic News Blog
Posted by: Steven Kline, Jr. 22. June 2015

Change in Real 10-Year Rate Increased in May

The real 10-year treasury rate was 1.31 percent in May 2015. This was the fourth month in a row that the real rate has risen, and it was the highest the real 10-year treasury rate has been since March 2014. It was the firsrt month since July 2014 that the change in the real rate was positive but the fourth month in a row that it has moved in this direction since its peak negative change in January 2015. While the nominal rate is still historically low, annual inflation has been negative for five straight months. This, more than anything, has been the cause in the increase in the change in the interest rate.

The Fed has indicated a desire for interest rates to rise, but has taken little action to make that happen. Increasing nervousness about the stock market may keep a lid on interest rates as well. However, with very low (or negative) inflation and a generally stable yield, it is likely that the change in real 10-year treasury rates will continue to increase. This is 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 has turned to a 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. Of course, this will largely depend on the Fed's decision to either raise interest rates or resume QE. Given the trend in rates, inflation, the exchange rate, and the overall economy, I find it hard to imagine that the Fed would raise rates. But, anything is possible.

The real Fed funds rate is an important leading indicator for the following industries: appliancesautomotivecustom processorsfurniture manufacturinghardwareHVACmetalcutting job shopsoff-road/construction machinerypetrochemical processorsplastics/rubberpumps/valves/plumbing productstextiles/clothing/leather goods; and wood/paper.

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