Economic News Blog
Posted by: Steven Kline, Jr. 19. September 2016

Real 10-Yr Rate Lowest since February 2015

(Positive) The real 10-year treasury rate was 0.75 percent in August 2016, falling below 1 percent for the third month in a row and reaching its lowest level since February 2015. Since the Fed announced it was raising its overnight rate, the real 10-year treasury rate has dropped each of the last nine 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. Of course, a more realistic rate of inflation than the CPI would show that the real 10-year rate is dramatically negative.

The year-over-year change in the real rate (the real rate is the nominal rate minus inflation) was virtually unchanged in August. The change in the real 10-year treasury rate was negative for the fourth month in a row, 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). Two, negative nominal rates. The amount of bonds yielding a negative rate continues to increase at a very rapid pace considering that just three years ago not a single bond had a negative nominal rate. And, formal Federal Reserve Chairman Bernanke has called for negative rates in the U.S. in the event of another recession.

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: appliancesautomotivecustom processorsfurniture manufacturinghardwareHVACmetalcutting job shopsoff-road/construction machinerypetrochemical processorsplastics/rubberpumps/valves/plumbing productstextiles/clothing/leather goods; and wood/paper.

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