Everyone believes interest rates have to go up…
After all, at less than 2%, 10-year Treasury bond yields are the lowest in U.S. history. They HAVE to go up… right?
If you believe that, you are part of “the crowd.” History says rates could stay this low for a long time. And possibly fall even lower in the next few years. Let me explain…
EVERYONE believes interest rates HAVE to go up. In Barron’s latest “Big Money” poll (out April 21), just 2% of respondents expected U.S. Treasury interest rates to go lower. Said another way, 98% of respondents don’t expect lower rates.[ad#Google Adsense 336×280-IA]But do interest rates HAVE to go up?
Let’s take a look at what’s happened in Japan for guidance…
In 1996, Japan cut interest rates from above 2% to next-to-nothing – just like Fed Chairman Ben Bernanke did a couple years ago.
As the chart below shows, long-term interest rates in Japan (the solid red line) followed the short-term rates (the dotted red line) lower.
Long-term interest rates in Japan fell below 1%. Today, long-term interest rates in Japan are STILL below 1%.
Just a few years ago, the U.S. started dramatically cutting interest rates like Japan did. And just like in Japan, long-term interest rates have come down slowly. Long-term interest rates in the United States are now down to 2%. This is just like it was in Japan when Japan started cutting rates.
In the next chart, I’ve overlaid the last five years of U.S. long-term interest rates (the solid blue line) and Ben Bernanke’s big interest-rate cut (the dotted blue line) over the same dates as Japan’s big interest rate cut in the ’90s. The outcome has been nearly identical…
So could long-term interest rates fall farther in the U.S.? Absolutely.
They’re in a downtrend, as the chart shows. And we’re right on track with Japanese rates from the ’90s.
Right now, 98% of people think rates can’t go lower (according to the Barron’s poll). And a lot of smart analysts are betting on them going higher.
They could very well be right. But as history shows, it’s NOT inevitable.
And when a huge majority believes something, the market has a habit of doing the opposite.
Steve Sjuggerud[ad#jack p.s.]
Source: Daily Wealth