Update on Interest Rates - May 29, 2013

Interest rates have gone up in the last few weeks.  I like to look at the 10-year yield.  As of this writing, it stands at about 2.12%.  The 10-year yield is highly correlated with mortgage rates.

The 10-year yield has been fluctuating over the last couple of years, but mostly in a range of just below 1.5% and just above 2%.  These are big moves in percentage terms only because the rate is so low.  But an increase of half a percent when the rate is higher is not much.  If the 10-year yield were 7% and it went to 7.5%, then it wouldn't be that much.

It is also important to take some perspective too.  The 10-year yield was actually over 3% back in early 2011.  If someone had told me two and a half years ago that the yield would be 2.12% today, I would have thought the person was crazy, or at least I would have considered that a very low rate.

So just because the rate has ticked up in the last few weeks, it doesn't mean that the bond bubble is about to burst.  The rate is up off of near all-time lows.

I still don't think it is time to short the bond market.  I think we will see significantly higher interest rates one day, but I am doubtful that it will be in the near future (within the next 6 months).  I am certainly not confident enough to put money into a short position on bonds right now.  There will come a time when it will be a good gamble to do so, but I don't think now is the time.

I don't see rates going up significantly as long as the Fed keeps creating new money out of thin air and consumer price increases are relatively tame.  I think rates will only go up when the market has a strong fear of price inflation or when the Fed stops buying debt for a sustained period of time.  But the only way the Fed is going to stop all of its so-called quantitative easing is if it is forced to stop due to rising prices.  In other words, I think we will only get much higher rates when we start to see much higher prices.

The price of gold is still just under $1,400 per ounce, which is well off of its all-time highs.  Interest rates are not paying much of a premium for inflation fears and they are paying almost no premium for fears of an outright government default.  So we have low interest rates.

If gold starts spiking up near or above its all-time highs, then that might be the sign that inflation fears are picking up.  That might be the time to consider dipping a toe in the water of shorting bonds, which is betting on higher interest rates.

Rates are still extremely low.  It is still a great opportunity to buy a house using a 30-year loan with a fixed interest rate and paying back your loan with depreciating money.  Your last mortgage payment in 30 years might be the equivalent of a lunch at that point.