For years now, the story has been the same. The Federal Reserve has stuck to its zero-interest rate policy with the expectation to raise rates in the future. However, the Fed hasn’t announced exactly when this will happen, yet rates are already rising. What gives?
Let’s take a look at the 10-year treasury yield. Rates for this treasury bottomed in January, yielding a grand total of 1.67 percent. In fact, this is a historical bottom, as rates for this treasury have never been so low. Since then, this treasury yield has risen to 2.35 percent. That’s a 40 percent increase in six months! This rate rise is seen across short-, medium- and long-term treasuries as well, so it’s not just an isolated event. So if the Fed isn’t officially raising rates, then who is?
Well, it’s anyone’s guess as to which market participants are responsible. Could it be that investors are selling and buying into rising equity markets? Could it be that investors are diversifying from treasuries into other asset classes like commodities? It could mean one, both or none of these things.
As the saying goes, “an economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.” One thing is for sure, rates are starting to rise and markets haven’t quite taken notice yet.
clearTREND research produced by our firm in Appleton indicates upward trends in U.S. equities despite recent weakness in domestic real estate. Our U.S. Economic Health Index shows that 50 percent of U.S. sectors are expanding while 29 percent are contracting.
“In today’s rising rate environment, it is important to keep an eye on assets that are especially susceptible to rate changes,” says Alexander Hunt, adviser to private clients and retirement plans. “For example, we’ve seen recent weakness in the real estate market, which could become a trend once Janet Yellen and the Fed initiate an official rising rate policy.”