Interest rates will break out of the 40-year cycle-to-cycle trend

OWe made a call last year for a 10-year Treasury yield of 3%, which was double the yield at that time. One of the main factors limiting the rise in the 10-year Treasury yield at the time we made this projection was the downward trend in inflation rates as well as short and long-term interest rates since the early 1980s.

As the following graph suggests, since the 1980s, when Federal Reserve Chairman Paul Volker ended the inflationary spiral, each successive economic cycle has featured a spike in inflation as well as interest rates at short and long term at lower levels than the previous one. business cycle.

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However, inflation recently broke its long-term downtrend significantly. We believe that continued economic growth combined with the recent surge in inflation creates an environment in which interest rates will also break above their declining and declining trend. It is now likely that short-term interest rates could climb to around 3% and that long-term interest rates head towards 4%.

With US Federal Reserve policy still loose and trillions of excess money and liquidity circulating in the financial system, it will take time for inflation to stabilize. In the meantime, short-term and long-term interest rates could reach levels above the peak reached during the previous economic cycle and break the 40-year trend of lower interest rates.

We believe that these higher interest rates in the coming years will eventually benefit savers and bond investors who rely on current income from high quality fixed income investments.


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Leslie M. Gill