Long-Term Interest Rates: The Newer Normal?

 

This chart shows the natural log of the 30-year Treasury yield. On a log chart, constant exponential growth is seen as a straight line. In this case, the line is sloping down. That represents constant exponential decay. The half-life has been about 20 years, meaning it takes about 20 years for the 30-year Treasury’s interest rate to get cut in half.

From about 1987 on, there have been no failures to the top of the decaying channel. The Great Recession did cause a failure to the bottom of the decaying channel though. As seen in the chart, a “new normal” bottom appeared with the same slope as the original but offset to the downside. The Covid-19 recession caused an additional failure to the bottom of the decaying trend channel. Will this become a “newer normal” bottom? Will the top of the channel also fail to the downside this time? Would be nice to know.

I keep hearing some experts and pundits say the long-term trend of declining long-term interest rates is finally over. They seem to think long-term interest rates can only go up from here. Where’s the evidence? So far, the only failures to this trend have been to the downside. While I could easily see long-term rates reach the top of the trend channel again, I am not at all convinced that the overall long-term trend is anything but down.

When exponential growth trends fail to the downside, most agree that the trend is over. Up is no longer likely. Apparently, most do not agree when exponential decay trends fail to the downside though. For what it is worth, I still continue to believe that up is no longer likely over the long-term.

What could change my mind? Well, it’s simple. It needs to fail to the upside instead of the downside. That means the yield has to reach the top of the channel and then exceed it. We’re certainly a very long way from that!

This is probably one of the most important investment decisions one could make right now. Where are long-term interest rates ultimately headed? And when I say ultimately, I really mean within one’s lifetime. I don’t think anyone really expects the ultimate conclusion of all this debt to be favorable outside of one’s lifetime. What can’t go on forever, won’t. But there’s still the question of timing. Sigh.