Long-Term Interest Rates Suggest Low Inflation

30-Year Conventional Mortgage Rates, 1971-2009:

30-year Treasury bond yields, 1977-2009:

AAA Corporate 30-year Bond Yields, 1962-2009:

Baa Corporate 30-year Bond Yields, 1962-2009:

Prime rate, 1955-2009:

In a previous post, I suggested that historically low 30-year mortgage rates reflected relatively low market expectations of future inflation. Some commenters (and Robert Shiller Friday afternoon on CNBC) pointed out that the Fed is buying mortgage securities, which is temporarily keeping 30-mortgage rates low, rather than low inflation expectations keeping rates low.

But the charts above that other long-term rates (30-year Treasury bond, 30-year AAA corporates and 30-year Baa corporates) are historically low, as well as the prime rate being historically low, and these low rates wouldn't necessarily have anything to do with Fed purchases.

Question: How could all of these long-term rates be so low if there were inflationary pressures building up in the economy, which would lead to higher expected future inflation, and higher nominal long-term interest rates, and not historically low long-term rates?

Comments

[Dave Wrixon:]

All this shows is that Bernanke's blatant attempts to rig the market are holding for now. If you are betting on long-term interest rates you would need to be very confident that this guy knows what he is doing. Don't forget, he never even seen the financial crisis coming and was a substantial contributor to the problem. He is also squandering tax payers money to attempt to redress the balance without having a mandate to do so. Frankly, I would sooner trust Madhof. At least he came clean before the scam was obvious to everyone.

Oct 18 05:04 AM

[Uppai Mappla:]

While consumer demand is still weak in US, which would have caused Ben Bernanke to keep interest rates low for the foreseeable future, another danger is looming up: the falling dollar. Markets like it. We're all making money. What if the slide in dollar may accelerate to a sudden, catastrophic plunge? Dollar should drift down s-l-o-w-ly to a fundamentally sustainable level which will help America to produce and the rest of the world to consume. The looming danger to American and world economy is a dollar crash which may occur unexpectedly. Even if it is temporary (like the 2008 oil spike), for the convalescing world economy the plunge and recovery will be leave a stab wound.

I invite everyone's attention to the sensible cover story "C'mon Ben!" in the current (Oct 19) issue of the Barron's. They are suggesting a hike to 2%, but I think that is uncalled for. What dollar needs is a parachute to ease it down gently. What about a half-percentage rise in short term interest rates?

Oct 18 07:11 AM

[Mark Anthony:]

Mark Perry:

Sure the long term US treasury rate is low and hence the official inflation rate in the USA is also low. On the same token do you realize that inflation in Zimbabwe is actually ZERO. I am not kidding. The official inflation rate in Zimbabwe must be zero. That's because President Mugabe, the Zimbabwe government and the central bank have ORDERED a MANDATORY PRICE FREEZE for everything in Zimbabwe. It's an official government policy to fix price for everything. When prices are fixed, of course the inflation rate is zero. Sure it is true the goods all disappeared from store shelves and they appear in black markets in much much higher prices. But we know black market is illegal and so hyperinflation in the black market is illegal hyperinflation, not a legal one.

The point I want to make is that just as the official Zimbabwe pricing fixing does not mean zero inflation - they merely succeeded in driving goods out of store shelves, making goods unavailable to the average people. On the same token official US policy of keeping the US treasury rates LOW does not mean low inflation either, they merely drive market capital to escape the US soil, just like Mugabe drive the goods out of Zimbabwe store shelves. Small businesses are unable to get loans, like like Zimbabwe people could not buy goods from stores at official fixed price. The manipulated low US treasury rate, mostly by the FED directly or indirectly buying our own debts, does NOT reflect the true market rate for the US treasury. You believe it if you believe Mugabe's order of price fixing fixed Zimbabwe's inflation to zero percent.

Hyper-inflation is coming to America. You will see it very soon.

Oct 18 11:30 AM

[IGDICK:]

How myopic! Where will financial institutions be with mortgages if the dollar collapses, and we have hyper inflation? Your blind spot is dazzling! There is no comfort in this situation...this is merely the effect of "quantitative easing" and not predictive of the future of inflation.

Oct 18 11:56 AM

[yellowhoard:]

Long term interest rates suggest that we are using QE.

We buy Britains debt, they buy ours.

We buy Japans debt, they buy ours.

Sometimes, our banks show up at the auctions and the Fed buys the paper a week after it was issued.

Long term interest rates are MEANINGLESS.

Oct 18 11:59 AM

[IGDICK:]

There is no comfort in this for those living on fixed income. Their return is down, and when waves of inflation come, they will be destroyed. These low interest rates are "government subsidized."

Oct 18 12:00 PM

[dcb:]

Your view is benign compared to the conclusions I have decided I believe in. I think he had a good idea of what was going to happen. But the masters at the Fed down in wall street really didn't care because the goal was to keep the party going and they knew they would be cashing out with their gains and the tax payer would eventually have to cough up the dough to bail them out. The guy was the greatest student of the great depression and yet he didn't understand the role of leverage and excessive cheap credit in the cause of the crisis. I'm afraid I can no longer believe that. Esp one must consider that in the summer of 2008 they were all having meeting about what to do with the impending crisis when geitner suggested making all wall street debt backstopped by US government. Then they were all on TV all the way down saying all things were going to be fine.

If I knew were going to collapse when the price of oil got high because I understood the nature of how much debt was in the system and a bit of a commodity induced recession, inflation, would make consumers unable to pay their debts and then collapse. I saw it, yet the best and brightest on wall street and the fed didn't. Too hard to believe I'm afraid. That's just fiction for the public.

the crash, destruction of household wealth, and the reflation of the system in a manner they knew was going to happen suited wall streets interests. Esp Goldman Sachs. Investment banks are the power behind the NY Fed, and NY Fed is the power in the Fed. I see huge profits and record bonus as clear reasons as to why the crisis has been good for them. Big Ben knows he is going to be set for life on leaving the FED, as to the other policy makers. all they need to do with the current system is maintain plausible deniability. Conformation of this theory is appointments of Geitner, Summers, and reappointment of Bernanke. Why else would you be putting in people who have had such a large role in ensuring the crisis happened and not being able to see it would happen.

I hate to say it, but one should look for easy explanations before complex ones. Other explanations just involve too many errors and too many rewards for people who made those errors for me to believe.

It suits those who hold the power to have the cheap easy credit go on for as long as they can, to drop the dollar and cause inflation. remeber they were telling us there was no inflation before when oil was rocketing. all you have to do is follow commodity prices to see the inflation in the piple line.
they rig the data because thye make a comparison right before the crash when inflationary prices were the highist. There is absolutely no reason why anything is wrong after what happen to have deflation for a few years other than it doesn't help wall street to earn money. strong dollar= lower energy prices= more free spending money for over indebted consumers=faster recovery. Why don't the Fed choose to engage in policies that deliberately prolong the recovery, why do we keep funding costs low when the money isn't being used to expand credit but inflate asset prices, why are we forcing the banks to lend.

1% of the US own 24% of wealth, they took a big hit and policies are designed to restore that wealth desparity as quickly as possable under the cover of "helping us". The rise in oil helped to trigger the crisis. caused by Bernanke's early rate lowering. the thoery was that by lowering rates early we would recover faster and be early to raise. that hasn't happened and won't happen. I'm sorry but other ways to explain the crisis, the response, and the continued headwinds to reform, etc. just don't allow any other way to explain what happened.

why did we pay AIG debt at 100%? why did we convet goldman to holding company, the list goes on and on. Rob emanueal said never waste a crisis. Well wall street hasn't they have used it as a way to consolidate power in the system and used the excuse of helping us to do it!!!


On Oct 18 05:04 AM Dave Wrixon wrote:

> All this shows is that Bernanke's blatant attempts to rig the market
> are holding for now. If you are betting on long-term interest rates
> you would need to be very confident that this guy knows what he is
> doing. Don't forget, he never even seen the financial crisis coming
> and was a substantial contributor to the problem. He is also squandering
> tax payers money to attempt to redress the balance without having
> a mandate to do so. Frankly, I would sooner trust Madhof. At least
> he came clean before the scam was obvious to everyone.

Oct 18 12:44 PM

[Jimbo:]

I am beginning to think Mark Perry has been smoking some really, really good stuff!~!!

Oct 18 03:52 PM

[Swashbuckler:]

I agree YH. The scales of the above charts range from 40 to 60 years. The recent massive liquidity injections are unprecedented in the US and render the charts moot. IMO.


On Oct 18 11:59 AM yellowhoard wrote:

> Long term interest rates suggest that we are using QE.
>
> We buy Britains debt, they buy ours.
>
> We buy Japans debt, they buy ours.
>
> Sometimes, our banks show up at the auctions and the Fed buys the
> paper a week after it was issued.
>
> Long term interest rates are MEANINGLESS.

Oct 18 05:51 PM

[j-dub:]

Been hanging out with Mark all weekend.

All I can say is "Don't knock La La (cough,cough) Land until you've been there."

"Mark, it goes clock-wise man."

Later dudes.

Oct 18 07:50 PM

[modern prag...:]

I love how they report inflation numbers, excluding food and fuel. I would agree that gas has come down from last years highs but I still need to put gas in my car and feed my family. I grew up in the grocery business and it blow me away how much food costs have increased over the last few years as a result of a number of governmental policies.

Oct 18 10:03 PM

[CLH:]

I love to read the comments from your articles Perry. How can so many people be so frightened and such losers?

Oct 19 07:16 AM

[Mad Hedge F...:]

xui For the last six months there has been a great big whopping contradiction in the markets. The stock market has been discounting a return to the “Roaring Twenties,” while the bond market has been anticipating another “Great Depression.” After yesterday’s publication of the Labor Department’s September nonfarm payroll number showing the loss of another 263,000 jobs, it looks like the bond market now has the upper hand. This takes the unemployment rate up 0.1% to 9.8%, and total job losses for this recession to 7 million. The really disturbing aspect of this number is that 57,000 teachers were fired, as states chop budgets to the bone. This is really eating our seed corn by the bushel full. Of course, I have been banging pots and pans, setting off distress flares, and yanking the fire alarm, trying to alert readers that this kind of disappointment was coming (click here for “Risk Reversals Can Be Such a Bitch” and here for “Stocks Offer No Value”). Shares have dropped 5% from last week’s peak, as the bond market soared, the ten year yield reaching nosebleed territory of 3.05%. The dollar maintained its flight to safety status, which to me is one of the great ironies of all time. It’s like that reprobate, alcoholic uncle with the bad teeth, who, when your car breaks down in the middle of a downpour in a bad neighborhood, will always let you crash on his sofa. Let’s call him your Uncle Sam. You have to hand it to PIMCO’s inveterate card counter, Bill Gross, who says this is all about transitioning to a “new” normal of 1%-2% real GDP growth. That’s why he was loading the boat with bond yields at 4%, a “ballsey” move at the time, which now smells like roses. I guess that’s why they call him the “Bond King.”

Oct 19 11:41 AM