Will interest Rates go downAre interest rates going to fall?
Following almost 35 years of falling fixed -income returns (and rallying prices), the markets have turned in recent years. At 3.09% this weekend, the 10-year US Treasuries return reached its highest since 2011. The " historical " movement creates fear among traders, as higher returns can be seen as a poor indication of a nervous equity markets - higher interest rates promote the shift from equities to debt to risk-averse traders, they lower exchange rates because higher interest rates discount expected gains, and equities vulnerable to debt cost, such as home builders, tended to fall in an increasingly interest driven setting.
However, if at all, like the recent resurgence of equity markets instability, higher interest rates can just mean a resumption of ordinary trading behaviour. In contrast to short-term interest rates, which are largely under the control of the Federal Reserve, long-term rates are fixed in the marketplace and are predicated on a mix of macro-prognoses, spreads, cash and cash equivalents, and expected rates in the near ahead.
For a long time, finance experts have been assuming that bonds yield is "mean-reverted". Share prices can rise further if a business gains value. However, fixed -income returns, according to economists, have some lower thresholds (rates can't go far below zero without really strange things happening) and a clear trend to lay around a long-term averages.
For the 10-year US bench marks, the median will depend on the timeframe. At around 5.5%, the post-war mean is well above the present level. Looking back further - already at the end of the nineteenth centuries - the long-term mean falls nearer to 4%. From 2000, the 10-year mean of 3.5% is not too far from what it is now.
Briefly, even though debt tends to return to the mean, no one knows what this long-term average is. One could say that the Fed is now better able to control rate increases (thanks, Paul Volcker), and less exposure to rate increases means that fixed income returns can remain lower than in the past.
Alternatively, one could suggest that the last 30 years have been the abnormality, that there will be a recurrence of price increases and that the corresponding long-term mean is calculated on the basis of mean values starting in the sixties or before. To some extent, consumers' interest rates are just as important, if not more important, than the real interest rates.
Insurers and retirement benefit schemes make estimates about long-term interest rates in order to determine the amount of their liability and the amount of the annuity. In the last 20 years, insurers have been repeatedly burnt when interest rates have not risen and businesses have found that they have undervalued some of their produce. As interest rates start rising again, everyone is reconsidering their own beliefs and asking this age-old investment question: