Let’s Take A Walk Through History…
On the last trading day of January, 2015, the 30 Year Treasury Bond stood at 3.01%. The Fed had just announced two weeks previously that they would raise rates for the first time in nearly 10 years. And that this move “signals the beginning of the end for the central bank’s stimulus program.”
“Fed officials emphasized that they intended to raise rates gradually…Short-term rates will rise by about one percentage point a year for the next three years, Fed officials predicted.”
Fast forward 3 years to the end of 2018 and the Fed raised again. “This is the fourth rate hike of 2018 and the ninth increase since the Fed began raising rates from near-zero three years ago.”
So, one would think given all these interest rate increases yields on the long term Treasury bonds would have shot up…right?
Well let’s take a look at one of my favorite sites on the interwebs, the Daily Treasury Yield Curve from the US Department of the Treasury and see what we find… 30 year Treasury Bond clocking in at…. are you ready??? Can you handle the suspense???
So 3 years and 9 rate hikes later the long government bond is 1 basis point higher than what it was BEFORE the hikes began!
The 10 year Treasury which should be your proxy for all things interest rates closed at 2.79% yesterday up from 2.27% at the end of 2015. A much higher increase in yields than the 30 year but not anything near what the Fed raises were.
Now, let’s go down the yield curve to a 1 year Treasury. 2015 it closed at .65%. Yesterday, 2.64%.
And that, my friends, is where the Fed DOES control interest rates, the short term. Their actions have almost no affect(effect???) on Long Term rates, and nominal effect(affect???) on intermediate rates.
But short term, e.g., CD’s, savings accounts, short term bonds, can see big time changes.
Now, I take issue to some degree with the good folks at the article I cited above by bankrate.com when they say:
““Today’s rate hike means borrowing gets costlier, especially for credit cards, home equity lines of credit, and borrowers with adjustable rate mortgages,” McBride says. “Consumers should aggressively pay down debt, refinance into fixed rates, and grab zero percent credit card offers to insulate against additional rate hikes and accelerate debt repayment.””
There is no 1 for 1 trade off here in consumer debt. There MAY be at your bank, mind you. But other lenders are more than ready to compete for your debt with low interest rate offerings simply because they can loan to you…and many, MANY others are a much higher rate than they are paying on their own long term debt.
They raise funds by issuing bonds with a long term focus, say a 30 year corporate bond. That bond’s interest rate is premise on what? The long term Treasury rates, which as I showed you above, hasn’t changed hardly at all.
They use the loan proceeds to lend to you, the consumer, at a MUCH higher rate and VOILA! profits can be had.
Will they be enticed to try and raise your rates? Sure! Will they get away with it to some degree? Yes, because many consumers will be too ignorant not to shop around because they are thinking the Fed is raising rates, thus ALL rates are higher. (For the millionth time, being ignorant is NOT being stupid. It just means one does not know! One of my pet peeves in life is how the language has implied ignorant equals being dumb. it doesn’t! AHHHHHH)
But if we go back to our NY Times article from 2015 they actually get something right. WHOA, hold on…did I just say that??? The NY Times got something right??? Wow, wonders never cease…
“Interest rates on mortgages and other kinds of loans, and on savings accounts and other kinds of investments, are likely to remain low for years to come.”
Well, they got the savings account part wrong there, but on the DEBT side they are mostly correct.
So, moral of the story… if you are making long term investment or borrowing decisions based on what the FED is doing, you’re doing it wrong. This is all the proof you need.