Interest Rate Monitor: September 2018

In this posting, we’ll continue on a theme that we’ve outlined since December 16, 2015, when we said:

“A single rate increase by the Federal Reserve in no way makes for a trend.  However, markets often lead the way and what initially seems ‘bizarre’ is only a natural change in regime, a change that we haven’t seen since the early 1940’s.”

The change “…that we haven’t seen since the 1940’s” is the secular trend in interest rates to go from an extremely low level to the opposite end of the spectrum, potentially to high double digit levels.  Our September 4,2014 posting suggested that:

“Investors anticipating a general rise in interest rates should feel some comfort in knowing that most manager in the utility sector are ready for what is to come.  Rising interest rates are not an automatic death sentence for utility stock prices or earnings.   In fact, the early stages of rising interest rates may see utility stocks match or exceed the returns of non-interest rate sensitive stocks, on a total return basis.  Only when the outlook is cloudy will it become difficult to offer projections that are in line with prior expectations.”

We have been consistent in the belief that the secular trend in interest rates is higher instead of lower.  With this in mind, we are presenting our upside targets (resistance levels) for the daily 3-month Treasury rates.  We use the daily 3-month Treasury rates simply because it precedes all Federal Reserve rate increases and decreases since 1934 (100%).

Below is the upside targets for interest rate which most likely will act as resistance levels to the upside momentum.  Exceeding the upside target implies that the next level is the target to watch for.

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As indicated in the chart above, the upside targets are:

  • 2.59%
  • 3.45%
  • 4.31%
  • 5.19%

As always, the 2.59% level, based on the Dow Theory 50% Principle, is the most difficult to achieve but is a significant milestone.  The failure or success at that level will indicated the medium term direction and will be accompanied by a psychological shift on the market.

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