On November 21, 2015, we said the following:
“While a Fed rate increase is what everyone is waiting for, history suggests that Fed policy (government regulated) follows short-term Treasuries (market driven).
“In a barely perceptible way, the chart above demonstrates that all Federal Reserve rate increases were preceded by a rise in the 3-month Treasury. The blue arrows indicate the reversal in the declining trend before 3-month Treasuries increased. From this point, we can easily see that the Federal Reserve’s discount rate follows to the upside not long after. We’ve only included the point in the interest rate cycle that corresponds to the phase that we are entering, coming from an all-time low to an eventual all-time high.”
We are clearly in the early stages of a secular rising trend in interest rates. As noted above, the direction is up for the foreseeable future. What concerns us now, as always, is the cyclical declines which can be dramatic. Below we trace out the first decline in the previous secular trend and see what that would look like in the current rate environment. Continue reading
