Are Interest Rates Falling?

The Real Estate Espresso Podcast

On today’s show we are taking a look at what the bond market might be signalling when it comes to the US economy and the global economy.

We have known that the yield curve has been inverted for a record period of time, more than 2 years as of now. An inverted yield curve happens when the short term interest rates are higher than long term interest rates. The classic metric has compared the yield between the 2 year and the 10 year treasury bond. Today the 2 year and the 10 year bond are still inverted. We still have an inverted yield curve against that definition. However, the yield spread between the 2 year and the 30 year has actually normalized and is no longer inverted. Of course that might change again in the next day, or even in the next hour and re-invert. But for now we have a short term rate below a long term rate. Yields for the 2 year have fallen, and for the 10 year and even for the 30 year. All of these rates have fallen. The only one that has stayed the same is the Fed Funds rate set by the Federal Reserve in the range of 5.25%-5.5%.

It’s not natural for long term interest rates to be lower than short term rates. You can’t see as clearly far into the future. That risk and uncertainty associated with the longer timeframe suggests that a risk premium would be warranted.

The memory of 2008 has faded for many. Most remember it today as a real estate crisis, confined to subprime mortgages. But the tentacles of 2008 were much wider. There were millions of job losses, large scale bankruptcies, bank failures, stock market declines. The wealth destruction that occurred during that period was a global financial earthquake. Too many people are pushing forward today as if there are no risks in the market.

We will see lower interest rates in our future, and higher interest rates at the same time. The rates for the safest investments will come down. But those perceived to carry a risk premium will face even more expensive money, even as interest rates fall. This is the fallacy associated with looking to a single rate as a determinant of our financial future.

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