How Low Could Interest Rates Go In The US?

With the 30 year US treasury yield near its record low which was reached in July 2016, this recent rally is nearly historic. The 30 year yield is closest to a new low (compared to other maturity dates) because the yield curve is flatter than it was during the treasury rally in 2016. Many parts of the curve have already inverted. The later maturity part of the curve is debatably the most important now because the inversion in the near term part of the curve can be explained by saying the Fed is simply behind the market when it comes to rate cuts. The Fed being behind the curve temporarily might not mean a recession is coming. However, the relatively low 30 year yield strengthens the yield curve’s further slowdown and increased recession risk. The next monthly NY Fed model update, which looks at the yield curve, will show higher odds of a recession in the next year than the prior update.

It’s a simple explanation as to why the 30 year yield has fallen. Growth and inflation expectations have fallen. That’s in tune with the recession call as the deeper the slowdown, the more likely it will turn into a recession. The catalyst for a recession doesn’t need to be large if the economy isn’t growing robustly.

Fund Managers Love Bonds

As you can see from the August Bank of America survey, a net 43% of fund managers expect lower short term rates and 9% expect higher long term rates in the next year. That’s the most bond bullish survey since November 2008.

It’s surprising the 30 year bond yield hasn’t hit its record low given the relative bullishness as compared to 2016. This survey is showing similar readings to 2007 right before the financial crisis. A massive recession which poses a risk to the financial system may not be likely, as we discussed in this article, but economic weakness is being priced in.

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Carol W 3 days ago Contributor's comment

Value stocks won't do well next year because most are in energy and financials. Doh! What about the other bezillion value stocks that aren't?