Interest Rates Are Too High

The chart in this post shows the quarterly average of the natural log of the 10 year treasury yield. I'm using a natural log so that constant exponential decay can be seen as a straight line.

This is just another way to look at the decline in interest rates. In the past, I've simply extrapolated linear trends on the interest rates themselves (which you can imagine for yourself if you look at this chart). These linear models must break when interest rates hit zero though (as nominal interest rates cannot fall below zero). The exponential model in this post is not required to break though. Interest rates simply approach zero but never actually get there.


Click to enlarge.

You will note that the trend lines are not straight. They are decaying parabolically. That means that interest rates are actually decaying faster than just exponentially. And why might that be? It is my opinion that our increasingly indebted and leveraged economy requires interest rates to fall at an accelerating pace lest we fall into a recession again.

You probably won't hear this on CNBC until it is blatantly obvious to all, but as seen in the chart, interest rates are too high again. If they don't come down very soon, something's going to break again in a most deflationary way. That's my opinion and I'm sticking to it.

March 11, 2014
Pimco Cuts Government Debt on Bets Fed Ends Buying by Year-End

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., cut holdings of Treasuries and U.S. government debt in February as turmoil in Ukraine fueled haven demand and investors bet the Federal Reserve will conclude bond purchases this year.

We've been through this before. Bill Gross sold big time in early 2011, right after I went all in on my IRA. I'd go all in again right now (at these "lower" rates), but I am already all in thank goodness (and holding to maturity). If you think I'm talking my book then I would point out that I actually root for higher interest rates. As a saver, falling interest rates do me no good if I'm planning to hold to maturity anyway, which I am. As the bonds (TIPS) in the bond ladder outside of my IRA mature, I would much prefer to reinvest at higher interest rates. I doubt that's going to happen though (at least over the long-term).

March 10, 2011
Bond King Bill Gross Exits US Debt: Good News?

Famed investor Bill Gross, who runs the PIMCO Total Return Fund, recently sold all of the US Treasury bonds is his fund’s portfolio.

It was horrible timing in 2011 and I strongly suspect that he's timing it poorly again. Buy high? Sell low? How did he ever become the Bond King?

I once again point out that I own long-term inflation protected treasuries because I feel that real growth will continue to fall over the long-term, not because I think inflation will skyrocket. I would definitely not heckle someone buying nominal treasuries right now. It's riskier but it could boost returns significantly if both real growth and inflation fall in the coming years, which I think is a distinct possibility.

And on that note, Japanese investors must be looking at our economic arrogance like we haven't got a clue since our real estate bubble popped. ZIRP? Stimulus? Calling these 10 year yields low? Predicting even higher interest rates? Thinking things have been fixed when they haven't? Been there? Done that?

This is not investment advice. Once again, just a horrifying chart (for savers) and some opinions. What's new?

Source Data:
St. Louis Fed: Custom Chart