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Interesting Interest Rates August 23rd, 2019 by John Gross

With all the talk about interest rate inversions, and what they may or may not be telling us about the economy, we thought we’d would take a look back in time to see if there is anything to see.

As it turns out, there is a great deal to see, but nothing consistent enough to bet the farm on.

But first things first - on Friday, the 2 and 10 year treasuries did invert by 0.01%, so we should expect to see more headlines warning of a recession, and tough times ahead.

However, in doing our bit of research, (remember, it’s called research, because we don’t really know what we are doing) we learn that the 1 year and 3 year treasuries have been inverted on a monthly average basis since January, and the 2 year and 3 year since December. Further, the 3 month and 10 year went flat in May, and have been inverted since then.

Interestingly, with rates as low, or negative as they are, ‘Ultra Long Bonds’ with maturities out 50 to 100 years are now being looked at. And that makes sense, given our high level of debt, and the current cost of money.

But let’s not get too far ahead of ourselves.

While some believe the 30 year bond is one of the most important indicators to follow, it only came into being in 1977, but was discontinued in 2002, as it was thought the cost of paying for long term debt was too expensive.

Just a few years later, though, the 30 year was brought back from the grave in 2006, and remains with us today.

Anyway, there is nothing magical about the 2 & 10 spread finally going into the red, as it has been trending lower for more than a few years now.

What is worth repeating, is the relationship between copper and interest rates – that is to say, generally speaking, rising rates associate with rising copper prices, and falling rates with lower prices.

It’s not a clean one on one relationship, but as you can see in the first chart in this week’s report, there is something to be said about how they behave together.

Taking this a step further, the attached chart illustrates copper prices, the prime lending rate, and recessions over the past 50 years, or so.

While the copper price / interest rate directional relationship is fairly clear, the timing of recessions is less obvious, if not impossible to predict with any accuracy.

Regards,
John


View Charts (PDF)

View Recessions Chart (PDF)