Friday, November 15, 2013

The Rising Interest Rate Environment

The following chart shows the inverse of the 5 year moving average of the 3-month treasury bill yield.

Click to enlarge.

Note that since the Great Recession about the only thing that seems to rise is the yield's inverse. Go figure.

If history is a guide, we just need five things to make short-term interest rates actually rise.

1. Pearl Harbor.
2. Patience.
3. Real economic growth.
4. A hawkish Fed.
5. Sarcasm.

In all seriousness, the 3-month treasury yield didn't hit 1% until 1948. That was nearly two decades after the stock market crash of 1929. In hindsight, savers couldn't even count on World War II to get yields higher. So why is there so much hope now?

I'm clearly not an optimist. Other than the long-term death of real yields, there's very little I count on. It's been a central theme of mine since turning permabearish in 2004. I'm not saying that the "death" is guaranteed to continue, but I would be among the last to bet that savers will soon be handsomely rewarded on their $7 trillion in savings deposits. That's six times what it was in 1995.

In fact, I'd probably be fighting the Japanese over that last bet opportunity!

Long-term TIPS bonds are/were the bubble? Seriously? At least long-term TIPS bonds are still paying a positive real yield, unlike the 0.51% nominal yield on the typical 5-year CD. And with $7 trillion in savings deposits, is that low rate really all that shocking? Banks should just put out a sign.

Why the @#$% do you think we want you to deposit even more of your @#$%ing money? We're in the @#$%ing lending business for @#$%'s sake!

This is not investment advice.

Source Data:
St. Louis Fed: 3-Month Treasury Bill: Secondary Market Rate


mab said...

I'm worried about the bond vigilantes. Very worried. Jeremy Siegel must be worried too.

They haven't been seen in years, and in the case of Japan, they haven't been seen in nearly two decades.

It's just not like them. Something must have happened.

Mr Slippery said...

You know we are long way from rising short term rates when the Fed is afraid to even slow down the enormous QE purchases.

The Fed is monetizing more than the "official" annual budget deficit. Hard to believe there are $45 billion/month in new mortgages to buy.

The Fed is fully in control of, and sitting on the entire curve. That means, interest rates aren't going to move much...unless the world loses confidence in the US government/Fed. Then, we become Argentina and get a couple of years of 40% inflation and 25% interest rates.

dearieme said...

I'm considering our equivalent to long TIPS, long Index-Linked Gilts. My morning paper tells me that there's one paying a positive real yield, a mighty 0.1% p.a., that might suit. Still, we could hold it in a tax-shelter.


By the way, mab, this is for you.

Stagflationary Mark said...


I'm worried that the bond vigilantes have been replaced by voyeurists out on bonds. We should keep them locked up, much like short-term interest rates.

We cannot just confine them to ivory towers! The thought of all those voyeurists with telescopes is just too creepy!

Panel would scrap bail money system

It's obfuscated headlines like that that make people wonder about our money system and what role bonds have within them. Do we scrap them? Do we bail them out? Who can really say for sure? It's hard to recognizance the difference! ;)

Stagflationary Mark said...

Mr Slippery,

...unless the world loses confidence in the US government/Fed.

On an absolute basis, we'd be nuts to have much confidence in the US government/Fed.

On a relative basis, we're doing fantastic though!

Author: In China, 'everyone is guilty of corruption'

Chinese public opinion surveys identify corruption as the most hated social problem, yet everyone is also guilty of it.

Stagflationary Mark said...


My morning paper tells me that there's one paying a positive real yield, a mighty 0.1% p.a., that might suit.

For what it is worth, it can get much worse in theory. Sigh.

Mundell-Tobin Effect Epiphany!


UK RPI: ~13.7%
UK Short-Term Rate: Ordinary Funds, Consistent Series: ~9.5%
UK Real Interest Rate: ~-4.2%

UK savers took serious damage in the 1970s.

dearieme said...


I see that on that old thread I boasted that our 1970s car lasted 15 years before we sold it. Our current one is a '94 model that we bought in Jan '96. Fingers crossed for its safety inspection next summer.

Stagflationary Mark said...


My '96 Camry is still 2 years behind you in the oldest car category! How am I ever going to catch up? ;)

Fritz_O said...

For what it is worth, it can get much worse in theory.

Or, to put it another way, for what it is worse, it can't get much worth in theory.

Stagflationary Mark said...


Yes! It can't get much worth in theory! Hahaha! Sigh.

As seen on the net and on net, our net worth may not net much if interest rates stay trapped in the ZIRP net much longer.

And when it comes to employment, the net result of no network could mean even more people relying on safety nets, although many may slip through the nets due to net budget cuts. At the very least, they'll net less.