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Long-Term Interest Rates Could Fall Below 1%By
Monday, May 7, 2012
Everyone believes interest rates have to go up...
After all, at less than 2%, 10-year Treasury bond yields are the lowest in U.S. history. They HAVE to go up... right?
If you believe that, you are part of "the crowd." History says rates could stay this low for a long time. And possibly fall even lower in the next few years. Let me explain...
EVERYONE believes interest rates HAVE to go up. In Barron's latest "Big Money" poll (out April 21), just 2% of respondents expected U.S. Treasury interest rates to go lower. Said another way, 98% of respondents don't expect lower rates.
But do interest rates HAVE to go up?
Let's take a look at what's happened in Japan for guidance...
In 1996, Japan cut interest rates from above 2% to next-to-nothing – just like Fed Chairman Ben Bernanke did a couple years ago.
As the chart below shows, long-term interest rates in Japan (the solid red line) followed the short-term rates (the dotted red line) lower.
Long-term interest rates in Japan fell below 1%. Today, long-term interest rates in Japan are STILL below 1%.
 Just a few years ago, the U.S. started dramatically cutting interest rates like Japan did. And just like in Japan, long-term interest rates have come down slowly. Long-term interest rates in the United States are now down to 2%. This is just like it was in Japan when Japan started cutting rates.
In the next chart, I've overlaid the last five years of U.S. long-term interest rates (the solid blue line) and Ben Bernanke's big interest-rate cut (the dotted blue line) over the same dates as Japan's big interest rate cut in the '90s. The outcome has been nearly identical...
 So could long-term interest rates fall farther in the U.S.? Absolutely.
They're in a downtrend, as the chart shows. And we're right on track with Japanese rates from the '90s.
Right now, 98% of people think rates can't go lower (according to the Barron's poll). And a lot of smart analysts are betting on them going higher.
They could very well be right. But as history shows, it's NOT inevitable.
And when a huge majority believes something, the market has a habit of doing the opposite.
Good investing,
Steve Sjuggerud
Further Reading:
With interest rates near 0% at the bank and less than 2% on government bonds, one expert says "stocks are the 'most attractive in over a half-century.'" In fact, he predicts that if rates remain this low, there's a 50/50 chance the Dow stock index will soar 4,000 points before the end of 2013. It's a bold prediction, but Steve believes he may be right...
Market NotesNEW HIGHS OF NOTE LAST WEEK
Hershey (HSY)... chocolate
Royal Bank of Scotland (RBS)... European bank
Abbott Laboratories (ABT)... World Dominating Dividend Grower
Anheuser-Busch InBev (BUD)... Big Beer Altria Group (MO)... Big Tobacco
CVS (CVS)... drug store
Colgate-Palmolive (CL)... consumer products
Visa (V)... credit cards
MasterCard (MA)... credit cards
American Express (AXP)... credit cards
Wyndham Worldwide (WYN)... hotels
Nordstrom (JWN)... department store
Charming Shoppes (CHRS)... clothing
Dollar General (DG)... shopping
Harley-Davidson (HOG)... motorcycles
Home Depot (HD)... home improvement
D.R. Horton (DHI)... homebuilder
AT&T (T)... phone service provider
NEW LOWS OF NOTE LAST WEEK
Chesapeake (CHK)... natural gas
Nokia (NOK)... Apple competitor
Research In Motion (RIMM)... Apple competitor
Jaguar Mining (JAG)... gold miner
Kinross Gold (KGC)... gold miner
New Gold (NGD)... gold miner
Goldcorp (GG)... gold miner
Iamgold (IAG)... gold miner
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