Here's Why Long-Term Interest Rates Will Rise in 2018
Exciting news...
Economists have come out with their predictions for interest rates this year.
They're all expecting long-term interest rates to rise. It's the same default setting they've been stuck on for decades. And guess what...
It has been wrong... for decades.
They say it every year. But since the 1980s, 30-year Treasury bond yields have been on a one-way road lower. Is this the year the economists will finally be right?
Actually, yes.
The last time we saw a setup like today, the yield on 30-year Treasury bonds rose more than 1% in less than six months.
History says higher rates are likely in the new year. But this signal has nothing to do with the economic reasons most people expect.
Let me explain...
Despite the usual chorus, long-term interest rates fell once again in 2017.
The 30-year Treasury yield fell from around 3% at the start of the year to around 2.8% at the close.
That's not a major decline. But it has caused a major shift in sentiment. That shift could mean the economists calling for higher rates might actually be right this time around.
You see, Treasury bonds – and the yields they pay – work like any other asset. When folks all expect them to move one direction, they tend to move the other way.
Today, traders are overly bullish on Treasury bond prices. And since bond prices and interest rates move in opposite directions, that means traders (unlike economists) are betting massively on lower rates right now.
We can see this by looking at the Commitment of Traders (COT) report. The COT report shows the real-money bets of futures traders.
Right now, traders are near all-time levels of optimism on 30-year Treasury bond prices. Take a look...
Again, bond prices and interest rates move in opposite directions. So this optimism about bonds means that futures traders are expecting rates to fall...
History says the opposite should occur.
You can see the last time optimism was near today's level was mid-2016. Traders all expected lower rates back then... But they didn't get them.
Instead, the 30-year yield rose around 1% in less than six months. It was a major move higher for rates (and lower for Treasury bond prices).
We have the same setup today.
For the first time in years, we're seeing a sign that the chorus of "higher rates this year" could be right... but not for the reasons folks expect.
We're seeing it because sentiment is stretched too far in the opposite direction.
The rubber band is due to bounce back. And that's the reason we'll likely see higher long-term Treasury yields this year.
Good investing,
Brett Eversole