Patience

Interest rate cycles are long: lasting not years, but decades. Consequently, we don’t have many data points for statistically significant conclusions about patterns. That said, we work with what we have, and the chart below shows 10-year US Treasury yields from 1850.

I’ll highlight three observations from this chart. First, cycles are indeed long: 40-50 years is not uncommon. Secondly, the turn to lower interest rates is preceded by a sharp (parabolic) spike higher, and then a very quick and meaningful decline. Thirdly, in contrast to the turn lower in interest rates, the turn higher occurs gently, over a long period of time.

The last big turn higher in interest rates occurred nearly 70 years ago, so very few of us have any first-hand experience. Rates peaked in 1920, following the inflation of the Great War, which induced a severe recession (the subject of Jim’s Grant excellent new book, The Forgotten Depression). Rates fell through the end of the Second World War, and didn’t break its downtrend from 1920 till 1950. Even then, it took till 1970 for yields to surpass the 1920 peak.

The turn to higher yields took even longer at the end of the previous century. Yields peaked in the Civil War and fell till 1890. Yields bounced around at low levels (around 3%) for 30 years, before moving decisively higher in 1920.

Today, we are still waiting for interest rates to reverse the decline that began in 1980. It will happen; one day. But given a history of this turn occurring over decades, it is the brave (or more likely, foolish) seer that attempts to call that date. Graveyards are filled with the bones of strategists calling the turn in interest rates (actually, graveyards are filled with the bones of strategists, period).

Sadly, I’m not smarter than everyone (anyone?) else, so my preference is to observe. Given that interest rate cycles are measured in decades, I’m not too concerned with having to predict when the turn higher comes. It will be enough to know which cycle we are in.

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