Going Up! Long-term Interest Rates on the Rise

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The Federal Reserve is expected to lower interest rates, but the economy and stock market don't need stimulation. Treasury Bills yield 2.5% more than their historical average, while long-term bonds earn 0.5% less. Inflationary pressures from COVID spending could lead to an increase in long-term government bond yields and a debt spiral.

Everyone expects the Federal Reserve to “pivot” – to lower interest rates – primarily because inflation appears to be under control. But the economy and stock market are flourishing, so they don’t need stimulation.

The real question: Where should interest rates be? History can be our guide. Over the 98 years from 1926-2023, inflation has averaged 3%, so about the current level. Treasury Bills have yielded the rate of inflation and Treasury bonds have returned 2% above inflation, about 5%.

As shown in the following, Treasury Bills currently yield 2.5% more than their historical average, so it’s reasonable to expect them to decline if inflation remains at 3%. But long-term government bonds are earning 0.5% less than the historical average, so they can be expected to increase, and to increase more than 0.5% if inflation increases.