I have been hearing a lot about rising interest rates. Whether it’s speculation around when the Fed will end quantitative easing and raise the Fed funds rate, or how the 10-year US Treasury yield’s recent rise above 2% may have kicked off a “Great Rotation” from bonds into equities, headlines seem to be sounding the alarm of higher rates.
Take a look at these early year headlines:
- “Ten ETFs to Own if (When) The Fed Raises Rates”
- “Rising Rates Stir Policy Debate”
- “Fed’s Plosser says Long-Term Rates Rose on Economic Outlook”
- “U.S. Rates Will Rise Despite Fed Intervention”
Except, you know what? All of these headlines came out in January or February — but only one of them is from 2013. The first headline is from 2010, the second from 2011, the third 2012, and the last one from this year. Since the beginning of the current post-financial crisis low rate environment, every New Year has started with speculation that this year will be the year that rates finally move higher.
Each year we have seen rates creep higher from January to March, and each year rates have ended December lower then where they started out the year. In fact, the highest rate on the 10-year UST in each calendar year of 2010 – 2012 came in the first few months.
This pattern raises two questions as we look at the current environment: Why did this trend happen historically? And will it repeat again this year?
I can offer a theory on the first one, and readers of my recent posts can probably guess where I stand on the second.