The Reason Interest Rates Are Going Higher Than You Thought

The reason interest rates are going higher than you thought is that the inflation rate keeps heading up once all the measures are in and revised. The latest reported such figure, the core personal consumption expenditure index, aka “the CPE,” surprised analysts by coming in higher than expected.

The January, 2022 CPE, reported on February 24th, came in at 5.4% while most had anticipated 5.0%. This was an increase of the December, 2023 number of 5.0%. In addition, revisions to the consumer price index trended upward rather than the same or downward, another indication of inflation’s firm grip.

The fixed income markets of bonds and bond-related securities don’t wait to see what the Fed will do about it — “gee, I wonder if the Fed will act? — no, the markets already figure it out and rates go up. That’s because the Federal Reserve people know that to bring inflation down, they have to take actions that move rates further up.

It’s not a big secret. As a result, short-term interest rates are higher than long-term rates, a condition known as “inversion.” Analysts with MBAs and experts with PhDs tell us that such a condition often precedes a recession, and they’ll point to charts that they say proves it. Stock markets then react by selling off further.

Here’s the short-term yield on the Treasury’s 3-month offering:

Those are “basis points” which translates as 4.730%, a higher yield than any of those previously seen on this chart. Note the low of -2.25% just after the March/April pandemic scare stock market lows. Yields on short-term notes can be volatile but this is some kind of record.

Now, here’s the yield chart for the Treasury’s 10-year note:

With a yield of 3.961%, it’s unusually much lower than the yield on the 3-month Treasury — that’s the inversion that the financially well-educated keep talking about. Is it a reliable indicator of a recession that would come just before a U. S . Presidential election season?

But wait there’s more. Here’s the point-and-figure chart for the Treasury’s 30-year bond:

After bottoming at .85% in early 2020, the 30-year yield has taken off, now offering 3.964%. That’s higher than usual but still below the 3-month yield. This inversion of the typical rate structure is concerning as it’s becoming greater than it’s ever been, according to those who follow this market closely.

That yields have risen so much is the reason that bonds have sold off so steadily since late 2019. When rates go up, fixed income instruments go down. Take a look at this point-and-figure chart for the benchmark iShares 20+ Year Treasury Bond ETF:

Those who purchased it at $170 4 years ago could sell it today for $100 for a 41% drop in value. Although it has bounced off a low of $91, investors must be wondering now about the risks of possible Fed actions on interest rates as they attempt to combat inflation.

Not investment advice. For educational purposes only.