As we have been presenting and debating for over 20 years, the big picture discussion over US inflation / disinflation / deflation and then inflation again is clearly shown on any long-term chart of the US Bond Yield. The last time we had US 10 year interest rates at a cyclical low of around 2% was after the Second World War.
A 30 year cycle of rising inflation from these low levels led to runaway inflation in the 1970’s, eventually peaking at close to 14%.
This rising cycle started as a steady and gradual climb, reaching the more normal levels of 6-7% during the 1950’s and 1960’s.
This is the cycle we find ourselves in today. Comparisons with what happened in the great bond bull market of disinflation and ultimately deflation from the 1980’s to the mid 2010’s are meaningless and quite frankly pointless, unless looking at behavioural patterns. The long-term chart above shows some painful blow off phases in this rising interest rate environment in the late 1950’s and then again in the mid 1960’s.
The gentle climb, and subsequent break of the current long-term bull market, in 10 year US interest rates has a very long way to go. Importantly, when these increases are gradual this is not disruptive for other asset classes but can become so, when volatility and painful blow offs occur. Which they will do.
As can be seen from the chart below, when 10 year interest rates rise, it’s not just the Trump government that has higher interest costs. The chart shows 30 year mortgage rates in the US (which looks remarkably like the blue shaded area in the chart above) following the rising interest rate trend – which will have repercussions for the pricing of housing and other asset classes.
The executive summary is simple. In the longer term the only way to manage the vast swathes of global debt is by inflating it away. Not dissimilar to the WWII debt which was significant at the time. In the shorter term, gradual rising US interest rates that are well telegraphed is good for growth but will become unruly for markets in the blow off phases. Income investing must remain focused on floating / inflation protection and not locking into generational low long-term rates.
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