For the fifth consecutive January, the financial markets are greeting the new year with a decent rise in interest rates. Check out the yield on the 10-year note, which today is fluttering around 2.00%.
A similar thing happened in 2009, 2010, 2011 and 2012. Look.
And with every uptick in interest rates, you got a spurt of fear-mongering about the imminent popping of the bond market bubble.
- 2009: The bond bubble is an accident waiting to happen
- 2010: The bond market is wrong
- 2011: Are bonds the next bubble?
- 2012: Is the bond bubble about to pop?
- 2013: Central bank hot air pumps up bond bubble
And yet the long-awaited spike in interest rates hasn’t materialized. In fact, US interest rates remain near all time lows. Here’s a look at them going back to the late 1950s.
Given how wrong bond-bubble Cassandras have been for the last half decade, you may be tempted to write them off once the chatter about the imminent destruction of the bond market starts to pick up. (We’re predicting you’ll be hearing quite a bit of it as rates keep rising.)
But we also think that might be a mistake. To paraphrase what Mr. Keynes is supposed to have said, when the facts change, it’s worth changing your mind. And the US economy is undergoing a significant shift. For years after the financial crisis, nobody wanted money. (Why borrow to invest in a miserable economy?)
But demand for money is picking up. Check out this chart, which shows the percentage of respondents to a Federal Reserve lending survey who say demand for mortgages is rising or falling. After spending much of the last few years in negative territory, these metrics have moved solidly higher. That means bankers are seeing more loan demand.
We’re not saying that a spike of interest rates is imminent. A sharp rise in interest rates could have all kinds of bad impacts. Are banks, that own tons of bonds, adequately hedged? Will inflation start to get out of hand? Could a rise in interest rates reduce borrowing again? So the Fed is going to work very hard to keep that from happening. And the facts could change yet again, for instance if an austerity push results in the US slipping back into recession, rates could easily go lower again. But from where we sit, a slow grind higher for US interest rates seems downright likely.