I think US interest rates could drop.

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Cookie Dough
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Re: I think US interest rates could drop.

Post by Cookie Dough » Tue Feb 13, 2018 8:51 pm

randomguy wrote:
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).
Interest rates are not independent dice rolls, so yes, what happened in 2008-2018 will influence 2018-2027. Along that line, we will see 3%, 4% and 5% before we see 6%. The duration of those rates would change the average significantly more than 0.5%.

randomguy
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Re: I think US interest rates could drop.

Post by randomguy » Tue Feb 13, 2018 11:47 pm

Cookie Dough wrote:
Tue Feb 13, 2018 8:51 pm
randomguy wrote:
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).
Interest rates are not independent dice rolls, so yes, what happened in 2008-2018 will influence 2018-2027. Along that line, we will see 3%, 4% and 5% before we see 6%. The duration of those rates would change the average significantly more than 0.5%.
Maybe. Maybe not. 1.5% (i.e. we skip right to 4) to 2% interest rate (we skip 5) increases in one year have happened :) But lets use the 10 year average. That is 2.65% (the high rates of 2010/11 are enough to counteract the low rates). Is that drastically lower than the our current rate? Does .2% change your opinion?

We just got done with a 40 year time period of where interest rates were 2-3x the average historical interest rates for a good chunk of it. Before that we had a 25 year period where interest rates were in the narrow 1.9->3.1% band. Would any of our last half dozen years look out of place there? And the 40 years before that were in the 2-6% range. If you ignore the 1966-2007 period nothing stands out about our current situation as being really abnormal. Obviously ignoring a huge chunk of US history isn't right but there is also a strong history of rates hanging around our current values for a long time Or of course soemthing could happen to cause rates to skyrocket. Eventually the people who are calling for higher rates (which they have been doing for at least 20 years now) will be right. But if that is in 1 day to 10 years is far beyond my crystal ball.

alex_686
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Re: I think US interest rates could drop.

Post by alex_686 » Wed Feb 14, 2018 7:51 am

randomguy wrote:
Tue Feb 13, 2018 11:47 pm
Would any of our last half dozen years look out of place there? And the 40 years before that were in the 2-6% range. If you ignore the 1966-2007 period nothing stands out about our current situation as being really abnormal.
A big difference is that for the time range you quoted we had fiat money, which tends to be inflationary. Before then the world was more or less on the gold standard. The gold standard is deflationary. Bond holders love deflation, even with a zero coupon their wealth increaseses.

The real rates we faced are historically low. Inflation under a fiat currency is historically low. We have not hit the bizarre land of 0% inflation or real rates but it is still an odd time.

WillRetire
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Re: I think US interest rates could drop.

Post by WillRetire » Sat Feb 17, 2018 12:10 pm

rgs92 wrote:
Mon Feb 12, 2018 2:03 am
The conventional wisdom (at least what I detect) is that interest rates are on the way up, but this seems wrong to me.
You are not alone in this thinking. Robert Kessler was on Wealthtrack this week. He has long been very concerned about global growth prospects and the long term effects of the tremendous stimulus used in 2008-09, amongst other things.

His take is: Be fearful of asset classes that can go down, including stocks & bonds. He suggests buying treasuries, and in the worst case, holding them to maturity.

The wealthtrack web site seems to be having an issue with its domain name registration. Normally, you can watch episodes there.

To see this week's episode with Robert Kessler, visit: https://youtu.be/dnal6-5I-vQ

rgs92
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Re: I think US interest rates could drop.

Post by rgs92 » Sat Feb 17, 2018 1:13 pm

Thanks for all that info and the good link WillRetire.
My intuition-antennas always get alarmed when I sense a common wisdom for the short or medium-term outlook.

Higher interest rates can only be supported by both significantly higher wages and a social willingness to bear the pain of recession, and I just don't sense those are in the cards.
I certainly don't see any Paul Volcker-style policy around any time in the future.

I just can't see that the actionable advice I have read to go short-term-only or cash-only for one's fixed income allocation makes sense at all.
And in fact, since long-term rates are mostly influenced by market forces, not policy, a big jump in these seems far fetched.

So no big bets on high interest rates are warranted (or even tilting towards them).
Subjective? Sure. But that's just my few cents here.

And as far as an overheated economy and a wage-price spiral, just anecdotally, unemployment and layoffs in the professional/IT area are still rampant among my large circle of acquaintances, so I sure don't see any wage push.
Last edited by rgs92 on Sat Feb 17, 2018 1:30 pm, edited 2 times in total.

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willthrill81
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Re: I think US interest rates could drop.

Post by willthrill81 » Sat Feb 17, 2018 1:18 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
Image

I'm sure that there were many Japanese investors back in 2008 who just knew that interest rates would keep rising.

If it's happened in recent times in other places, it could happen here. No guarantees save two.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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FIREchief
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Re: I think US interest rates could drop.

Post by FIREchief » Sun Feb 18, 2018 1:46 am

triceratop wrote:
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.
Isn't the difference between nominal and real rates a measure of expected inflation? (i.e. NOT unexpected inflation)
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

heyyou
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Re: I think US interest rates could drop.

Post by heyyou » Sun Feb 18, 2018 2:22 am

Whatever does happen to interest rates, I suppose that we (DW and I) will just have to muddle through, same as last time, and the time before that one.

broslami
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Re: I think US interest rates could drop.

Post by broslami » Sun Feb 18, 2018 3:52 am

its possible. a more likely scenario is inflation is picking up so interest rates will go up.

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triceratop
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Re: I think US interest rates could drop.

Post by triceratop » Sun Feb 18, 2018 6:20 am

FIREchief wrote:
Sun Feb 18, 2018 1:46 am
triceratop wrote:
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.
Isn't the difference between nominal and real rates a measure of expected inflation? (i.e. NOT unexpected inflation)
That’s correct. And yet my point was that as much as 75% of rate change recently been about real rate increases. My point was not about the question you ask.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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nedsaid
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Re: I think US interest rates could drop.

Post by nedsaid » Sun Feb 18, 2018 11:38 am

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
Hi Garland, I used to believe that increased government borrowing caused higher interest rates but the actual evidence for the "crowding out" effect is pretty slim. You could have made a case for the Vietnam War in the 1960's and 1970's and the guns and butter policy of the US government for being a factor in increasing interest rates. Even then, higher rates were mostly a function of increasing inflation. Again note that we ran relatively large deficits during the Reagan and Obama Administrations and yet interest rates did nothing but fall. Note that during those two administrations, inflation also fell. My belief is that the correlation is not between US Government borrowing and interest rates but is between inflation and interest rates.

I remember hearing an economist lecturing the crowd that high deficits during the Reagan Administration would cause eventual bankruptcy for our nation as well as higher interest rates. I asked him a simple question afterwards: Why is it that Reagan is running big deficits and interest rates are going down and that Thatcher in the UK is running surpluses and UK interest rates are going up? Shouldn't it be the opposite? A smart ass twenty something year old dared to ask the question and the economist had no answer. He said he didn't know and I give him credit for his admission. But it pretty well blew his arguments out of the water.

I have to ask the question, does the US Government debt fund anything at all? I have the increasing sense that the answer is no. The US Government could by fiat simply issue 0% interest currency to cover its deficits and not bother with the credit markets. When I pull currency out of my wallet and see the title "Federal Reserve Note" on my bills, I realize what I hold is a zero percent interest note payable in yes, another zero percent note. You realize this is a function of public confidence and a lot of voodoo behind the scenes to make this all work.

So what gives the dollar its value? Public confidence for one. Also the vast productivity of the US economy. A third factor is the level of interest rates paid on our debt which in essence backs our currency. Fourth, would be international confidence in our economy and our government policies. Really, the dollar is a unit of productivity and it is something that we all agree is legal tender, mostly because the government says so.

So what will happen with the larger deficits? My prediction is pretty much nothing. My further prediction is that the increased debt will be effortlessly funded and effortlessly serviced. Bad things like inflation will happen if money creation gets out of whack with increased productivity. We know that the government can create money by fiat but also that the private banking sector can create money through the money multiplier effect. Private borrowers, however, have to service their debt through earnings or consumption of savings and cannot create new money to service their debts. If they try, the Secret Service will eventually knock on their door. Sovereign governments with debts in their own currency are not revenue constrained and can always issue more currency to cover their interest payments. So this is the fundamental difference between a Sovereign nation borrowing in its own currency and private borrowing where everything is transacted in a currency created by a Sovereign nation.

So as I think it through, Sovereign debt is as much created by fiat as currency is. Except if you take some of your zero percent currency and buy US Treasuries, you will at least get some interest. If you let the currency sit in your pocket, it collects zero interest. It is interesting that I read somewhere that the IRS will accept Treasury instruments in payment for tax bills. So pretty much Treasuries are a form of currency that pays interest. The Internal Revenue Service, in effect, has declared US Treasuries as a form of currency. Think about it.

So I guess that 30 something years later, I am a smart ass 58 year old. :wink:
A fool and his money are good for business.

NYCwriter
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Re: I think US interest rates could drop.

Post by NYCwriter » Sun Feb 18, 2018 12:34 pm

My bond funds (NY Muni in taxable, Intermediate and Short-term) are giving me heartburn but I haven't made any changes, other than keeping a bit more cash in MM as part of allocation. The gradual rise in interest rates since the recession was somewhat predictable, but it's been so long I had forgotten what the hit means :)

I've kind of resolved to not chase my tail over it, since trying to anticipate or time has rarely worked that well.

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nedsaid
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Re: I think US interest rates could drop.

Post by nedsaid » Sun Feb 18, 2018 8:42 pm

I have thought a lot about the monetary system and how all of this works for a few reasons. First, I have concerns about the safety of my treasury investments. My conclusion is that the promised principal and interest payments will be made. Second, I have a vested interest in the financial health of the country because I will be eligible for both Social Security and Medicare in a few years. I will be depending upon those programs. My ultimate concern is that inflation will remain restrained and that I will be able to maintain my living standards.

What effect do higher budget deficits have upon inflation? That is my concern. Again, the evidence seems mixed. It appears that the deficit spending to finance WWII and the Vietnam War helped trigger higher inflation. On the other hand, inflation fell during the Reagan and Obama years. So even the monetary model that I have presented doesn't explain everything. So just as deficit spending doesn't seem to relate to interest rates, the evidence is also very mixed that such deficit spending affects inflation. There are other factors at work here.

The U.S. economy is a complex mechanism with millions of people participating in economic decision making through the marketplace. Public confidence plays a big role in all of this, and the level of confidence is a difficult thing to predict. If people have confidence in whatever system you have, it is much more likely to work. When confidence falters, it is very hard to get that confidence back. The public confidence is the voodoo that makes all of this work.
A fool and his money are good for business.

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