Bond yields are the lowest since the Kennedy administration, according to Erik Weisman, chief economist at MFS investment Management. Despite that interest rates took off immediately after last week’s election pushing the 10-year Treasury yield up, Weisman keeps a tepid view of future yields.
Weisman examined the 10-Year Treasury Yield for the past 35 years during a recent press briefing in New York City.
“Ten-year yields were low in the ‘60s, they creeped up in the ‘70s, they went really high at the end of the ‘70s and early ‘80s and they’ve been down for the last 35 years,” he said. “Ten-year yields are still the lowest since the Kennedy administration.”
From 1962 to 1981, yields soared from near 4% to above 15% by 1981. Since 1981, yields have steadily tumbled. In early July of this year, the 10-year Treasury Yield hit a particularly low rate of 1.36%. It’s since shot up to near 2.3% this week.
And while yields will likely move higher – it’s unlikely they’ll reach their historic levels.
“We were lower with our highest yields in the mid-1980s, and then we were lower with our highest yields in the next business cycle. We were lower in our highest yields in the George W. Bush business cycle. And we’ve been lower in the Obama administration business cycle. And the numbers sequentially are lower lows,” Weisman said. “Every cycle, we get a lower high and a lower low.”
According to Weisman, new lows are possible in the next cycle.
“If someone wants to make the argument to me that we’re not going to hit lower yields in this business cycle – OK, I can buy into that,” he said. “What about the next recession?”
Weisman questioned whether monetary policy would have stamina to maneuver the next recession.
“How much monetary policy is there going to be out there? Certainly there’s not going to be a lot of room for lower rates. We’re going to do more quantitative easing? How big does that balance sheet need to be?” Weisman explained.
Meanwhile, Weisman said it looks like “we’re going to do a lot of fiscal policy perhaps here in the next bunch of years” under President-Elect Donald Trump.
“How much more are we going to do in the next recession?” Weisman added. “I’m not sure we’re going to have the levers to push and pull to get us out of the next recession pretty easily.”
Weisman then pointed out that the lowest yields don’t actually occur during the recession.
“The lows occur in the business cycle,” he said. “And most recently they occurred during the jobless recovery, as inflation is really rolling over and as labor inputs are really low and as sentiment is really bad.”
Weisman thinks the U.S. hasn’t seen the lows in interest rates yet.
“Unless you can tell me that many of the problems we’ve been suffering – not just for this business cycle, but for the last couple – are magically going to go away because Trump is that magic fairy, then I think there’s some really good [chance] for us to see interest rates go lower at some point before it’s all said and done,” he said.
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