I think US interest rates could drop.

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rgs92
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I think US interest rates could drop.

Post by rgs92 » Mon Feb 12, 2018 2:03 am

Since rates in Europe, like the German 10 year bond at .75%, are still low, how could US rates stay so much higher (like the US 10 year at 2.8%)?
The conventional wisdom (at least what I detect) is that interest rates are on the way up, but this seems wrong to me.

Many comments here seem bearish on bonds, but it seems misplaced to me. I feel there is no reason to lower the bond allocation or shift from bonds to cash-equivalents in the fixed-income part of a portfolio.

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Re: I think US interest rates could drop.

Post by Theoretical » Mon Feb 12, 2018 2:18 am

Currency hedged, the rates are comparablein both directions. Also, the end of quantitative easing is a known unknown in that it having an effect in some way is almost guaranteed but how that effect spirals out remains to be seen.

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Re: I think US interest rates could drop.

Post by rgs92 » Mon Feb 12, 2018 2:26 am

OK, but, even so, I think the forecast of rising rates in the overall bond market (say, BND, the total bond market) is not necessarily a sure thing, and certainly not something to assume is true and sell bonds because of this.

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Re: I think US interest rates could drop.

Post by gsmith » Mon Feb 12, 2018 2:38 am

Theoretical wrote:
Mon Feb 12, 2018 2:18 am
Currency hedged, the rates are comparablein both directions. Also, the end of quantitative easing is a known unknown in that it having an effect in some way is almost guaranteed but how that effect spirals out remains to be seen.
I would agree with Theoretical... we are possibly coming out of an addiction to cheap money from unprecedented measures.
If further intervention is not taken, we could look for reversion to historical yield curves, but that cannot be guaranteed.

Alas, the only safe path forward is to stay the course.

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Re: I think US interest rates could drop.

Post by visualguy » Mon Feb 12, 2018 3:19 am

It's hard to imagine interest rates going anywhere but up considering current government policies and the economy, but who knows for sure.

I'm mostly out of bond funds - happy with the stability of CDs and stable value funds for fixed income. I get enough heartburn from the equities part of my portfolio - no need to get it from fixed income as well.

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Re: I think US interest rates could drop.

Post by alex_686 » Mon Feb 12, 2018 8:47 am

First, if you want to see exactly what the market is thinking, try this tool. I find it insightful.
http://www.cmegroup.com/trading/interes ... -fomc.html

Second, Theoretical mentioned currency hedged. To add to that I will point out that inflation is, and has been historically, higher in the US than in the EU. Factor out inflation and there is not much room to go down. 10 year treasuries are at 2.5%, from the TIPS yield we can figure that inflation is expected to be at 2%. So that gives us .5% real.

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Re: I think US interest rates could drop.

Post by 3CT_Paddler » Mon Feb 12, 2018 8:50 am

I don't think the Fed wants to be stuck at a zero interest rate or right at it when the next crisis hits. I would expect them to continue to push for rate increases until the next crisis hits.

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Re: I think US interest rates could drop.

Post by sunnywindy » Mon Feb 12, 2018 9:13 am

Part of the story is that the EU is behind the US in the overall recovery from the Great Recession. The US Fed is actively reducing their QE expanded balance sheet. On the other hand, the ECB is still engaging in QE at the rate of 30 billion euros a month, so one's expanding and one's contracting. We do know that QE is designed to suppres interest rates to make borrowing easier and hopefully have a stimulative effect on the economy, thus the ECB is doing this now because they need it.

I expect the EU to be done with their QE buying in 2019 and most likely you will see their bond yields rise at that time.
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Re: I think US interest rates could drop.

Post by z3r0c00l » Mon Feb 12, 2018 9:25 am

visualguy wrote:
Mon Feb 12, 2018 3:19 am
It's hard to imagine interest rates going anywhere but up considering current government policies and the economy, but who knows for sure.
This was often said in 2014 too, and rates went back down without a recession. When the next recession hits, a drop in rates is likely.

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Re: I think US interest rates could drop.

Post by JBTX » Mon Feb 12, 2018 9:26 am

rgs92 wrote:
Mon Feb 12, 2018 2:03 am
Since rates in Europe, like the German 10 year bond at .75%, are still low, how could US rates stay so much higher (like the US 10 year at 2.8%)?
The conventional wisdom (at least what I detect) is that interest rates are on the way up, but this seems wrong to me.

Many comments here seem bearish on bonds, but it seems misplaced to me. I feel there is no reason to lower the bond allocation or shift from bonds to cash-equivalents in the fixed-income part of a portfolio.
If I had to bet one way or other short term I’d say you are correct. I think long term trend rates will go up but short term there’s a lot of indigestion causes by loose fiscal policy, minor wage inflation and transition at the fed. Last couple of times rates went up due to uncertainty they ended up coming back down.

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Re: I think US interest rates could drop.

Post by JBTX » Mon Feb 12, 2018 9:28 am

z3r0c00l wrote:
Mon Feb 12, 2018 9:25 am
visualguy wrote:
Mon Feb 12, 2018 3:19 am
It's hard to imagine interest rates going anywhere but up considering current government policies and the economy, but who knows for sure.
This was often said in 2014 too, and rates went back down without a recession. When the next recession hits, a drop in rates is likely.
I had been saying the same thing for almost 20 years. Obviously I missed the mark on that.

Now that I’m thinking they will trend back down inevitably rates must go up!

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Re: I think US interest rates could drop.

Post by gotester2000 » Mon Feb 12, 2018 9:28 am

I thought interest rates primarily depend on inflation???

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Re: I think US interest rates could drop.

Post by triceratop » Mon Feb 12, 2018 9:37 am

gotester2000 wrote:
Mon Feb 12, 2018 9:28 am
I thought interest rates primarily depend on inflation???
The problem is that "US interest rates" is too vague a term and can mean both nominal and real rates. In fact in the past few weeks we have seen a substantial rise in real (i.e. after inflation) rates. For concreteness, using 10-year nominal and real rates, we can deduce that real rates so far this year (well, since Jan 2) increased 30bp, while nominal rates increased 39bp. In other words, the most recent interest rate moves have primarily not been about adjustments to unexpected inflation.
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Re: I think US interest rates could drop.

Post by dkturner » Mon Feb 12, 2018 10:06 am

I’ve been following the 20 basis points per year approach recommended by Larry Swedroe. Maturities can be extended as long as you are receiving 20 bp of additional yield for each year of increase in maturity. In the last few weeks this indicator has signaled that many intermediate term bond funds should be replaced with short term funds - if you want to maintain a stable risk/reward ratio.

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Re: I think US interest rates could drop.

Post by garlandwhizzer » Mon Feb 12, 2018 11:39 am

One reason why interest rates may go up is simply supply and demand. This year alone we will have a trillion dollar deficit on top of a very high debt/GDP ratio. In fact with the tax cuts and increases in military and domestic spending plus the Fed selling Treasuries to reduce their balance sheet we'll have to sell twice as many Treasuries this year as last year. Currency weakening in the US dollar also puts a cap on foreign purchases of Treasuries. Simply put, you may have to offer higher yields to attract twice as many buyers.

Why is our currency weakening even as our interest rates are the highest in the developed world? I have not heard a good explanation for this. Perhaps international investors are losing some confidence in us, wondering whether our government has become dysfunctional with ever deeper deficits, periodic threats of government shutdowns, new trade barriers, etc.. I hope this is not the case but there is a possibility that the world is losing faith in our ability to govern ourselves effectively. Perhaps there is the feeling that we may ignite inflation by overstimulating the economy when it is already at full employment. I don't know the answer to our persistent currency weakening. The rest of the world has its problems too but they don't seem eager to put their faith in the US dollar these days.

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Re: I think US interest rates could drop.

Post by Sandtrap » Mon Feb 12, 2018 12:04 pm

3CT_Paddler wrote:
Mon Feb 12, 2018 8:50 am
I don't think the Fed wants to be stuck at a zero interest rate or right at it when the next crisis hits. I would expect them to continue to push for rate increases until the next crisis hits.
Trying to understand the correlation.

Doesn't that push for rate increases encourage the next crisis?

j :D

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Re: I think US interest rates could drop.

Post by triceratop » Mon Feb 12, 2018 12:05 pm

garlandwhizzer wrote:
Mon Feb 12, 2018 11:39 am
One reason why interest rates may go up is simply supply and demand. This year alone we will have a trillion dollar deficit on top of a very high debt/GDP ratio. In fact with the tax cuts and increases in military and domestic spending plus the Fed selling Treasuries to reduce their balance sheet we'll have to sell twice as many Treasuries this year as last year. Currency weakening in the US dollar also puts a cap on foreign purchases of Treasuries. Simply put, you may have to offer higher yields to attract twice as many buyers.

Why is our currency weakening even as our interest rates are the highest in the developed world? I have not heard a good explanation for this. Perhaps international investors are losing some confidence in us, wondering whether our government has become dysfunctional with ever deeper deficits, periodic threats of government shutdowns, new trade barriers, etc.. I hope this is not the case but there is a possibility that the world is losing faith in our ability to govern ourselves effectively. Perhaps there is the feeling that we may ignite inflation by overstimulating the economy when it is already at full employment. I don't know the answer to our persistent currency weakening. The rest of the world has its problems too but they don't seem eager to put their faith in the US dollar these days.

Garland Whizzer
Excellent post as always Garland, but I have one minor quibble: to my knowledge the Fed has only announced that they will no longer reinvest proceeds from maturing treasuries and not that they plan to sell them outright, as a gradual plan to reduce the balance sheet. This is a difference only in form and magnitude not in kind I agree.
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Re: I think US interest rates could drop.

Post by Sandtrap » Mon Feb 12, 2018 12:06 pm

garlandwhizzer wrote:
Mon Feb 12, 2018 11:39 am
One reason why interest rates may go up is simply supply and demand. This year alone we will have a trillion dollar deficit on top of a very high debt/GDP ratio. In fact with the tax cuts and increases in military and domestic spending plus the Fed selling Treasuries to reduce their balance sheet we'll have to sell twice as many Treasuries this year as last year. Currency weakening in the US dollar also puts a cap on foreign purchases of Treasuries. Simply put, you may have to offer higher yields to attract twice as many buyers.

Why is our currency weakening even as our interest rates are the highest in the developed world? I have not heard a good explanation for this. Perhaps international investors are losing some confidence in us, wondering whether our government has become dysfunctional with ever deeper deficits, periodic threats of government shutdowns, new trade barriers, etc.. I hope this is not the case but there is a possibility that the world is losing faith in our ability to govern ourselves effectively. Perhaps there is the feeling that we may ignite inflation by overstimulating the economy when it is already at full employment. I don't know the answer to our persistent currency weakening. The rest of the world has its problems too but they don't seem eager to put their faith in the US dollar these days.

Garland Whizzer
Outstanding!
Thanks for the lesson.
j :D

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Re: I think US interest rates could drop.

Post by alex_686 » Mon Feb 12, 2018 12:10 pm

Sandtrap wrote:
Mon Feb 12, 2018 12:04 pm
Doesn't that push for rate increases encourage the next crisis?
I would argue the opposite. Low rates encourages asset bubbles. The lower the rate the more people are inclined to borrow and speculate, chase yield, and lever up one's portfolio. Cheap money helped the 2008 housing crisis. Lots of other examples out there.

The only reason why we have had low rates for so long is because the real economy has been so sluggish. Low rates are a little like opiates, necessary in the short run to handle trauma but maybe not the best long term plan.

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Re: I think US interest rates could drop.

Post by bikechuck » Mon Feb 12, 2018 12:14 pm

gotester2000 wrote:
Mon Feb 12, 2018 9:28 am
I thought interest rates primarily depend on inflation???
My opinion, given recent tax cuts and increased spending the U.S. needs to sell more bonds. If there is not sufficient demand for the bond offerings they will have no choice but to raise interest rates to stimulate demand.

So if I were to place a bet I would say interest rates will increase but I have often been wrong about this. There is much wisdom in choosing and allocation and staying the course.

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Re: I think US interest rates could drop.

Post by mega317 » Mon Feb 12, 2018 12:39 pm

This thread could be required reading for anyone who thinks they can predict anything. Quotes include:
It seems
I think
I don't think
Possibly
We could
Hard to imagine
We can figure
Is expected
Is likely
If I had to bet
If I were to place a bet

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Re: I think US interest rates could drop.

Post by RAchip » Mon Feb 12, 2018 2:20 pm

I am in the camp of the OP. It makes no sense that the US 10yr could yield 3+% when the German 10yr yields .75%. If US bonds start yielding well above what the rest of the world’s “safe” bonds pay, the demand for US bonds will increase and driving the price up and yield down. It just makes no sense that US bond yields can get way out of whack with the rest of the world.

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Re: I think US interest rates could drop.

Post by nisiprius » Mon Feb 12, 2018 2:35 pm

I think U.S. interest rates could go in any direction they darn please.

The first posting I noticed in this group that said "interest rates can only go up" was in 2009:
I know people don't like to market time but interest rates are currently zero and whether rates rise in 2010 or 2011 or 2015, eventually they will rise and intermediate term bonds will get hit. So isn't it wise to go short in this environment where rates can only go up?
Since then, interest rates have merrily moved in both directions. In February 2014, when 68 out of 68 economics polled by Bloomberg forecast that the ten-year Treasury rate would go up in the next six months, it went down. And, of course, claims that negative rates are impossible have been proved wrong.

Sure. U.S. interest rates could drop.
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Re: I think US interest rates could drop.

Post by alex_686 » Mon Feb 12, 2018 2:45 pm

RAchip wrote:
Mon Feb 12, 2018 2:20 pm
I am in the camp of the OP. It makes no sense that the US 10yr could yield 3+% when the German 10yr yields .75%. If US bonds start yielding well above what the rest of the world’s “safe” bonds pay, the demand for US bonds will increase and driving the price up and yield down. It just makes no sense that US bond yields can get way out of whack with the rest of the world.
2 points.

The US inflation rate in 2017 was 2.65, in German 1.74. This difference is expected to continue. So real rates narrow.

Second, Germany and the EU have a problem. Germany has a trade imbalance within the EU. Germany is considered to be the "safe" risk free government bond out there, so lots of financial transactions and bank reserves require Germany bonds. It is the reserve currency of the EU. Germany faces the same issues that the US has with its currency being the reserve currency, but magnified.

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Re: I think US interest rates could drop.

Post by bberris » Mon Feb 12, 2018 8:10 pm

3CT_Paddler wrote:
Mon Feb 12, 2018 8:50 am
I don't think the Fed wants to be stuck at a zero interest rate or right at it when the next crisis hits. I would expect them to continue to push for rate increases until the next crisis hits.
Right. They must raise rates ... so they can lower them.

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Re: I think US interest rates could drop.

Post by jalbert » Mon Feb 12, 2018 8:16 pm

alex_686 wrote:
Mon Feb 12, 2018 2:45 pm
RAchip wrote:
Mon Feb 12, 2018 2:20 pm
I am in the camp of the OP. It makes no sense that the US 10yr could yield 3+% when the German 10yr yields .75%. If US bonds start yielding well above what the rest of the world’s “safe” bonds pay, the demand for US bonds will increase and driving the price up and yield down. It just makes no sense that US bond yields can get way out of whack with the rest of the world.
2 points.

The US inflation rate in 2017 was 2.65, in German 1.74. This difference is expected to continue. So real rates narrow.

Second, Germany and the EU have a problem. Germany has a trade imbalance within the EU. Germany is considered to be the "safe" risk free government bond out there, so lots of financial transactions and bank reserves require Germany bonds. It is the reserve currency of the EU. Germany faces the same issues that the US has with its currency being the reserve currency, but magnified.
Germany uses the Euro.
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Re: I think US interest rates could drop.

Post by Tycoon » Mon Feb 12, 2018 8:22 pm

mega317 wrote:
Mon Feb 12, 2018 12:39 pm
This thread could be required reading for anyone who thinks they can predict anything. Quotes include:
It seems
I think
I don't think
Possibly
We could
Hard to imagine
We can figure
Is expected
Is likely
If I had to bet
If I were to place a bet
This is a very astute observation.
Appeal to Pity:When pity is envoked to support a statement | Appeal to Popular Sentiment:Appealing to unrelated prejudices and attitudes | Hasty Generalization:Too little evidence to support the conclusion

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Re: I think US interest rates could drop.

Post by alex_686 » Mon Feb 12, 2018 8:25 pm

jalbert wrote:
Mon Feb 12, 2018 8:16 pm
Germany uses the Euro.
I am missing your point. Let me state mine again. I assume you are referencing the second point.

When a European bank or financial institution needs risk free bonds for their reserves, to post for collateral, etc. they use German bonds. Greek banks don't use Greek bonds because Greece keeps threatening to declare bankruptcy. They use German bonds. Because everybody uses German bonds they become very liquid, once again depressing yields.

The Euro is a little weird. The EU Central Bank has some but not all of the power of the US Fed.

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Re: I think US interest rates could drop.

Post by garlandwhizzer » Mon Feb 12, 2018 9:39 pm

triceratop wrote:
Excellent post as always Garland, but I have one minor quibble: to my knowledge the Fed has only announced that they will no longer reinvest proceeds from maturing treasuries and not that they plan to sell them outright, as a gradual plan to reduce the balance sheet


You are right, triceratop. Sorry for the mistake. The Fed will no longer invest proceeds from maturing Treasuries or, I believe, invest the interest payments on held Treasuries back into buying more of them. This will result in a slow and gradual reduction of the balance sheet as it is currently planned and by itself shouldn't disturb the bond market too much.

Garland Whizzer

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Re: I think US interest rates could drop.

Post by petulant » Mon Feb 12, 2018 9:52 pm

visualguy wrote:
Mon Feb 12, 2018 3:19 am
It's hard to imagine interest rates going anywhere but up considering current government policies and the economy, but who knows for sure.

I'm mostly out of bond funds - happy with the stability of CDs and stable value funds for fixed income. I get enough heartburn from the equities part of my portfolio - no need to get it from fixed income as well.
It's also worth remembering a couple more points. First, the Fed's policy tools that affect interest rates are more effective for short-term rates, not long-term rates. Their most important traditional tool, the Federal Funds rate, is entirely a short-term tool. The result is that short-term rates can rise while long-term rates do not, resulting in a flattened yield curve. That's part of what's happened over the last couple years. Now, QE as a tool can affect long-term rates since the Fed purchased debt securities with varying durations, including long-term mortgage-backed securities. But the Fed isn't actively selling those securities so much as collecting repayment, meaning the effect is muted.

Second, and I think this is has been pointed out obliquely, but any expectation that rates will rise can be priced into current expectations about interest rates and inflation. For example, if I think there's a substantial risk rates will go up, I am less likely to buy Vanguard's long-term bond fund. With fewer people buying similar funds and buying the assets, there is less demand, which increases the rates. So what affects rates after that are not the actual Fed announcements but any surprises from the Fed announcements. So, when the Fed delayed raising rates a few times in the last three years, I think that new information may have resulted in lower rates for a while (beyond just the effect of the rates not being raised).

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Re: I think US interest rates could drop.

Post by zeugmite » Mon Feb 12, 2018 9:55 pm

I think the question to ask is, is 0.5% real a good yield? Maybe, maybe not. Real GDP growth is higher than that right now even by lowball estimates, but maybe retirees decide to withhold consumption and demand collapses, or maybe automation will drive productivity through the roof. And 2.8% nominal, inflation is a little above 2% now, and it may go up with fiscal indiscretion, or it may vanish if asset bubbles pop. So who knows -- too much depends on things that haven't happened and are yet to be decided and acted on by unpredictable humans.

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Re: I think US interest rates could drop.

Post by sambb » Mon Feb 12, 2018 9:59 pm

Might be a really good time to rebalance out of some stock gains from the last few years, and catch bonds trading near their 52 week lows. Of course, might not. But it is a soemthing to consider if your risk tolerance has changed and you want to take profits off the tbale

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Re: I think US interest rates could drop.

Post by 3CT_Paddler » Tue Feb 13, 2018 11:06 am

Sandtrap wrote:
Mon Feb 12, 2018 12:04 pm
3CT_Paddler wrote:
Mon Feb 12, 2018 8:50 am
I don't think the Fed wants to be stuck at a zero interest rate or right at it when the next crisis hits. I would expect them to continue to push for rate increases until the next crisis hits.
Trying to understand the correlation.

Doesn't that push for rate increases encourage the next crisis?

j :D
Yes... which is why they have taken so long to start raising rates.

The Fed knows that if a reenactment of 2008 occurs soon with rates at near zero there are even fewer bullets in their gun. They are trying to take the Goldilocks approach to raising rates.

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Re: I think US interest rates could drop.

Post by MnD » Tue Feb 13, 2018 12:42 pm

Anything is possible, but those hoping the recent interest rate run-up is a blip seem to be looking at recency versus reality.
i think the 10-year is going to 6% before the current business cycle is over for the numerous reasons mentioned earlier in this thread.

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Re: I think US interest rates could drop.

Post by Sandtrap » Tue Feb 13, 2018 12:43 pm

3CT_Paddler wrote:
Tue Feb 13, 2018 11:06 am
Sandtrap wrote:
Mon Feb 12, 2018 12:04 pm
3CT_Paddler wrote:
Mon Feb 12, 2018 8:50 am
I don't think the Fed wants to be stuck at a zero interest rate or right at it when the next crisis hits. I would expect them to continue to push for rate increases until the next crisis hits.
Trying to understand the correlation.

Doesn't that push for rate increases encourage the next crisis?

j :D
Yes... which is why they have taken so long to start raising rates.

The Fed knows that if a reenactment of 2008 occurs soon with rates at near zero there are even fewer bullets in their gun. They are trying to take the Goldilocks approach to raising rates.
Thanks.
Appreciate the lesson.
What is a "Goldilock's Approach"??

mahalo,
j :D

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Re: I think US interest rates could drop.

Post by 3funder » Tue Feb 13, 2018 12:44 pm

3CT_Paddler wrote:
Mon Feb 12, 2018 8:50 am
I don't think the Fed wants to be stuck at a zero interest rate or right at it when the next crisis hits. I would expect them to continue to push for rate increases until the next crisis hits.
+1, even if said increases don't happen at a torrid pace.

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Re: I think US interest rates could drop.

Post by 3CT_Paddler » Tue Feb 13, 2018 1:11 pm

Sandtrap wrote:
Tue Feb 13, 2018 12:43 pm
3CT_Paddler wrote:
Tue Feb 13, 2018 11:06 am
Sandtrap wrote:
Mon Feb 12, 2018 12:04 pm
3CT_Paddler wrote:
Mon Feb 12, 2018 8:50 am
I don't think the Fed wants to be stuck at a zero interest rate or right at it when the next crisis hits. I would expect them to continue to push for rate increases until the next crisis hits.
Trying to understand the correlation.

Doesn't that push for rate increases encourage the next crisis?

j :D
Yes... which is why they have taken so long to start raising rates.

The Fed knows that if a reenactment of 2008 occurs soon with rates at near zero there are even fewer bullets in their gun. They are trying to take the Goldilocks approach to raising rates.
Thanks.
Appreciate the lesson.
What is a "Goldilock's Approach"??

mahalo,
j :D
It's a cautious approach to increasing the Fed funds rate. As in, if we sense the market is in trouble, we will hold off on raising rates. We are in one of the longest bull markets in US history, and the Fed is still being relatively tentative about its rate increases.

PS I am no more in the know than you or anyone else on here... just going off of a couple simple facts - 1) Economy is doing very well with low unemployment, 2) The Fed has fewer options when rates are near zero and an economic shock occurs.

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Re: I think US interest rates could drop.

Post by BigMoneyNoWhammies » Tue Feb 13, 2018 1:27 pm

alex_686 wrote:
Mon Feb 12, 2018 12:10 pm
Sandtrap wrote:
Mon Feb 12, 2018 12:04 pm
Doesn't that push for rate increases encourage the next crisis?
I would argue the opposite. Low rates encourages asset bubbles. The lower the rate the more people are inclined to borrow and speculate, chase yield, and lever up one's portfolio. Cheap money helped the 2008 housing crisis. Lots of other examples out there.

The only reason why we have had low rates for so long is because the real economy has been so sluggish. Low rates are a little like opiates, necessary in the short run to handle trauma but maybe not the best long term plan.
It was also my understanding that the Fed's target inflation rate of 2.0% has consistently been undershot for years now despite rate increases, so I doubt they feel under any sort of pressure that they're going to trigger another recession with their plan of steady rate increases and slowly reducing their balance sheet. This is part of why they do it in an incremental manner over an extended period of time, to not panic the market. Having a few % points of interest rates to cut when the next recession hits will be a good thing as long as they can steadily raise the Fed fund rate without inflation spiraling out of control as a result. If rates are at or near 0 when the next crisis comes along, the Fed loses half their tool kit for dealing with the situation.

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willthrill81
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Re: I think US interest rates could drop.

Post by willthrill81 » Tue Feb 13, 2018 1:33 pm

For those that think interest rates are destined to rise, I'll just say one word: Japan.
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JoeRetire
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Re: I think US interest rates could drop.

Post by JoeRetire » Tue Feb 13, 2018 1:46 pm

willthrill81 wrote:
Tue Feb 13, 2018 1:33 pm
For those that think interest rates are destined to rise, I'll just say one word: Japan.
And I'll say 4 words: Pretty Much Everywhere Else

garlandwhizzer
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Re: I think US interest rates could drop.

Post by garlandwhizzer » Tue Feb 13, 2018 2:03 pm

I don't know whether over the long term rates are going to go up, down, or remain stable. I do expect them to go up somewhat in the short term, as they already have largely due to the FED. For decades until recently the pressure on rates has been to the downside. What is different now is that QE is no longer active now and short term rates are rising largely due to a growing economy and the FED's rate normalization process. This may or may not reverse in the near/intermediate term future. A lot depends on whether increasing inflation takes hold, something that hasn't happened for decades. There are strong secular forces--technology, massive debt loads, DM demographics, and globalization--that have kept a lid on inflation and in fact tended to produce deflation. It will be interesting to see whether co-ordinated and increasing world wide economic growth in combination with years of ultra-aggressive monetary policy worldwide changes this equation.

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unclescrooge
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Re: I think US interest rates could drop.

Post by unclescrooge » Tue Feb 13, 2018 2:52 pm

alex_686 wrote:
Mon Feb 12, 2018 8:47 am
. To add to that I will point out that inflation is, and has been historically, higher in the US than in the EU. Factor out inflation and there is not much room to go down. 10 year treasuries are at 2.5%, from the TIPS yield we can figure that inflation is expected to be at 2%. So that gives us .5% real.
Isn't that just a result of the US turning from an emerging market into a developed market?

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unclescrooge
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Re: I think US interest rates could drop.

Post by unclescrooge » Tue Feb 13, 2018 2:54 pm

JoeRetire wrote:
Tue Feb 13, 2018 1:46 pm
willthrill81 wrote:
Tue Feb 13, 2018 1:33 pm
For those that think interest rates are destined to rise, I'll just say one word: Japan.
And I'll say 4 words: Pretty Much Everywhere Else
And I'll add my 2 cents: except Europe

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Re: I think US interest rates could drop.

Post by alex_686 » Tue Feb 13, 2018 4:48 pm

unclescrooge wrote:
Tue Feb 13, 2018 2:52 pm
alex_686 wrote:
Mon Feb 12, 2018 8:47 am
. To add to that I will point out that inflation is, and has been historically, higher in the US than in the EU. Factor out inflation and there is not much room to go down. 10 year treasuries are at 2.5%, from the TIPS yield we can figure that inflation is expected to be at 2%. So that gives us .5% real.
Isn't that just a result of the US turning from an emerging market into a developed market?
I wouldn't think so. America has been a developed country almost any way you cut it since World War II. I am looking at the monetary and banking system. Maybe you are looking at something else.

I think it is much more of a cultural issue. Inflation favors debtors and risk takers, which America is famed for. German is paranoid about inflation has dragged the rest of the EU in that direction. Everybody blames the hyperinflation under the Weimar Republic but I am not so sure. Japan has been trying to fan the flames of inflation for the past 20 years without any success, partly due to a high savings rate, sluggish growth, demographics, and other debated factors.

In that vein, the level of inflation is not that important. In cross county studies inflation does not matter much as long as it is constant and under 10%. It does not matter much if inflation is 1% or 5% as long as everybody knows about what rate it will be in the future.

Easy Rhino
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Re: I think US interest rates could drop.

Post by Easy Rhino » Tue Feb 13, 2018 5:40 pm

Well, they could. Or maybe they'll go up. I can't predict accurately.

I would prefer (because my opinion matters?) if rates rise a bit so we are at more "normal" levels of interest rates.

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Re: I think US interest rates could drop.

Post by oslocal » Tue Feb 13, 2018 5:47 pm

unclescrooge wrote:
Tue Feb 13, 2018 2:54 pm
JoeRetire wrote:
Tue Feb 13, 2018 1:46 pm
willthrill81 wrote:
Tue Feb 13, 2018 1:33 pm
For those that think interest rates are destined to rise, I'll just say one word: Japan.
And I'll say 4 words: Pretty Much Everywhere Else
And I'll add my 2 cents: except Europe
It seems. :twisted:

randomguy
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Re: I think US interest rates could drop.

Post by randomguy » Tue Feb 13, 2018 6:03 pm

Easy Rhino wrote:
Tue Feb 13, 2018 5:40 pm
Well, they could. Or maybe they'll go up. I can't predict accurately.

I would prefer (because my opinion matters?) if rates rise a bit so we are at more "normal" levels of interest rates.
Looking at the 10 year right now we are at 2.83. The mean is 4.57. The median is 3.86. We might be a bit low but I would say that we are in a pretty normal level of variance from the mean. It isn't like we some crazy 5% outlier level.. The problem is not many of us remember the levels of 1930-60 while a lot of us remember the abnormally high level of 1960-2000 so what we consider "normal" is skewed horribly.

Obviously rates can go lower. They have risen ~50% since the lows of a couple of years ago. Going back to those levels isn't exactly some crazy prediction. Over say the next 30 years, I am pretty comfortable saying rates will rise to a higher level than today. Figuring out the next 6-24 months on the other hand is a crap shoot. Maybe we have another recession and the Fed gives quantive easing another shot. Maybe there is some big crisis (financial, political) and there is a huge flight to quality that drives down the prices. And so on.

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Re: I think US interest rates could drop.

Post by Cookie Dough » Tue Feb 13, 2018 6:44 pm

randomguy wrote:
Tue Feb 13, 2018 6:03 pm
Looking at the 10 year right now we are at 2.83. The mean is 4.57. The median is 3.86. We might be a bit low but I would say that we are in a pretty normal level of variance from the mean.
A 10 year average versus the mean is a better guidepost. I don't see a reason to buy duration here with the flat yield curve unless you are trying to express a negative US view, in which case reducing your US equity AA will give you a bigger win.

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sergeant
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Re: I think US interest rates could drop.

Post by sergeant » Tue Feb 13, 2018 7:23 pm

Maybe! I have no idea. I gave up guessing a few years ago after being certain (and wrong) they had to rise for about 7 years.
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randomguy
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Re: I think US interest rates could drop.

Post by randomguy » Tue Feb 13, 2018 8:16 pm

Cookie Dough wrote:
Tue Feb 13, 2018 6:44 pm
randomguy wrote:
Tue Feb 13, 2018 6:03 pm
Looking at the 10 year right now we are at 2.83. The mean is 4.57. The median is 3.86. We might be a bit low but I would say that we are in a pretty normal level of variance from the mean.
A 10 year average versus the mean is a better guidepost. I don't see a reason to buy duration here with the flat yield curve unless you are trying to express a negative US view, in which case reducing your US equity AA will give you a bigger win.
Why do you think what happened in 2008 or 9 is going to have a major influence on what happens in 2027? If rates today were 6% today, would you think we are would be in the same situation (i.e. the average would only be like .5% higher despite the 10 year average being 2x as high).

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