Interest Rate Update

Long term interest rates have remained at historically low levels throughout the majority of the year. At the beginning of the year, most prognosticators anticipated interest rates to move up in lock step with Fed interest rate hikes.

Most long-term rates are tied to the benchmark 10-year Treasury rate which is currently hovering around 2.19% (8/17/17). Why have long term interest rates remained low, while the Fed continues to hike short term rates?

1. U.S. Treasuries are viewed as an international “safe harbor” investment. Recent international tensions (specifically, recent tensions between the U.S. and North Korea) have prompted an increased demand for investors in to U.S. Treasuries. According to an 8/12/17 article in Bloomberg by Brian Chappatta, “Ramped-up bellicose rhetoric between U.S. President Donald Trump and North Korean leader Kim Jong Un has stoked fears of imminent war, driving 10-year Treasury yields to the lowest level since June.”
2. Current inflation and the outlook for future inflation remains low. Treasury bond investments change along with the outlook for inflation because inflation erodes the fixed income return on bonds. With the outlook for future inflation low, yields on longer term treasuries have been held at historical low level.
3. U.S. Treasuries are still a good value for global investors as its yield remains significantly higher than debt from competing countries. The U.S. 10-Year Treasury currently trades at 2.19%, while the 10-year German Bund trades at .38% and Japan’s 10-Year Bond is trading at .05%.

Dan Friedeberg
Chief Executive Officer
danf@slatt.com