The Great Rate Experiment

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“Pay no attention to that man behind the curtain."  The Wizard of Oz

Come one Come All!!  Whether you knew it or not, we have been on what could be called “The Great Rate Experiment” ride for over 30 years.  Starting in the mid 80's governments and central banks have had one dominant response any time the economic wheels started to wobble – Lower Rates.  When we started this ride there seemed to be a lot of space between where we were in rates, over 11% according to Bloomberg in the early 80’s and where we are now, sub 1%.  I imagine central bankers began this process of lowering rates to spur the economy with the thinking that it was just a temporary fix.  "Don’t worry boys; we'll raise them rates as soon as things get better".  All to find out that after a while the easy way seems to be the only way.

They say history doesn’t always repeat itself but it does rhyme.  Hence - The Wizard of Oz analogy.  For those who may not know, The Wizard of Oz was not only a movie made to entertain; it was a political diatribe arguing the big issue of the day in the late 1930’s – our monetary system moving from the Gold Standard to paper money. The Yellow Brick Road represented gold, while the silver slippers explained the use of that precious metal (in the original book the slippers were silver, this was later changed to rubies for the movie). Dorothy was walking towards the Emerald City (Washington D.C.) which was pushing for a paper money that was green. The creator of The Wizard of Oz, Frank L. Baum, apparently didn’t care for President McKinley because the leader of the Emerald City was portrayed as a charlatan.  Fast forward to real time and it seems that societies obsession on monetary policy has been around for quite some time, with good reason.

Now, we sit at an interesting time, especially for investors wishing to get a return in lower risk ventures.  To prove the point let's take a look at the interest rates of some of the more developed nations in the world to see what yield/return investors get for parking their hard earned capital in government debt for 10years. (source: Bloomberg):

  • U.S.  1.88%
  • U.K. 1.48%
  • Canada 1.27%
  • France.64%
  • Germany .22%
  • Japan -.05%
  • Switzerland -.44%

Yes, your eyes are not deceiving you.  The last two are negative returns.  How great would that be?  Loan your money to the Japanese or Swiss government and have less money returned to you than you gave them.  You got that right Dorothy, "We're not in Kansas anymore".

As you can see by this short list, the U.S. is the tallest midget.  Or is that, the tallest little person?  None the less, you get the point.  Currently the U.S. 10 year Treasury offers some of the best yields in the developed world.  For this reason is why we have been touting in our Lunch and Learns that the path of least resistance for interest rates is still lower regardless of what The FED does.  Let’s remember that for the majority of 2015 the financial media was overly fixated on The Fed and whether or not they will raise rates.  Well, they finally did raise rates at the end of the year, and guess what happened to longer term rates after The Fed made their move?  Contrary to what you may have thought prior to The Feds rate increase, long term rates have actually declined.  Here is a picture to prove the point.


As you can see in this chart of TBF, an exchange traded fund that attempts to track the movement in 10 year Treasuries, rates have moved lower since The Fed did their first jolly step in raising rates in 2015. 

Based on the fact that U.S. rates are higher than the rest of the developed world, I would not be surprised to see our rates continue to trend lower as more capital is attracted to the U.S.  From a technical standpoint, the following chart displays a pattern that would also speak of lower rates and higher Government bond prices.  This is a chart of IEF, an exchange traded fund that attempts to track the PRICE of 10 year government debt. As rates go lower this fund should move higher.

What does this mean for you and your portfolio?  It means that if rates trend lower then rate sensitive investments such as Government Bonds and possibly Traded REITs should continue to behave kindly in a portfolio.  Whereas financial stocks whose earnings benefit from higher rates may be a lag in a portfolio.  And don’t rule out Gold.  The yellow metal may become more attractive as investors look to diversify within alternatives they perceive could provide a hedge in a lower rate or even negative rate world.

The problem for investors will be the future.  As rates continue to get compressed we will be setting up an environment where smaller and shorter term increases in rates will have a more dramatic effect within portfolios.  For now, for those that are positioned to benefit from lower rates the ride could be a nice one.  I just hope investors will have the grace and timing that is now associated with Peyton Manning as to when to retire those investments when they are at the top of their game.


Warmest Regards,

Colby McFadden


The opinions expressed are those of Colby McFadden and Quiver Financial as of March 9, 2016 and are subject to change due to market or other conditions. This is not a solicitation or recommendation of any investment; always consult a Financial Advisor before investing into any investment. Securities offered through Newport Coast Securities, Inc. - Member FINRA / SIPC - Advisory Services Offered through Newport Coast Securities, Inc. 18872 MacArthur, 1st Floor, Irvine, CA 92612 - 800.992.5592