Interest rates shot up over the last month, spooking investors and the markets worldwide. The fast paced move was the main reason why, because it was a first in recent years, explains Mary Anne and Pamela Aden, editors of The Aden Forecast.
Interestingly, this jump in rates coincided with a major crossroads in interest rates that we’ve been watching for quite a while. The 3% level was the line in the sand for both the 10 and 30 year yields. And whichever way interest rates went next was going to determine what lies ahead.
Well, both of these rates surged way above 3% and the message was loud and clear — interest rates are going to head higher in the months and years ahead. And as we saw this past month, that’ll continue to affect other markets and the global economy.
Interest rates are the most powerful markets in the world. Even though they’re generally underrated, they’ve dominated the world stage for a long time. Taking a look at the chart below and you’ll see what we mean.
This chart shows the 30 year yield going back to 1930, along with its mega red moving average, which identifies the super longterm trend. Note, for instance, that this interest rate rose from 1945 to 1981 and the mega trend was up for those almost 40 years.
The mega trend has been down since the early 1980s, finally hitting a bottom in 2016. So the mega downtrend lasted about 35 years. And in the last 10 years, interest rates were extremely low, in some cases hitting 0%, which was a 5,000 year low. The point here is to show you that this mega trend does not change often.
But now that the 30 year yield has broken out to a new five year high, well above the mega moving average at 3%, it’s confirming that the mega trend has now clearly turned up; see a more close up view on this chart:
The 10 year yield also hit a seven year high, above 3% reinforcing the overall action. This means interest rates will continue to rise, albeit gradually, but they’ll be moving up for a very long time.
In fact, it would not be surprising to now see the 30 year yield rise up to near 4½% (see the horizontal line, marking this next resistance area). The leading indicator is reinforcing this. It’s on the rise but it has yet to reach the high area, meaning the 30 year yield is indeed poised to rise further.
For starters, rising interest rates will mean lower bond prices. Since these two markets move in opposite directions, you’ll want to avoid bonds. As you can see, the long-term government bond price is currently breaking down below its uptrend since 2011 and it’s bearish. The leading indicator is also set to fall further and it’s pointing the way down.
Higher interest rates will likely slow the global economy and it’ll especially put more pressure on the emerging countries, who are already feeling the heat due to their U.S. dollar denominated debts. Rising interest rates will make it more difficult to pay these debts. And some experts feel this could lead to contagion, eventually triggering another financial crisis.
The 2 year Treasury yield is at a 10 year high and it has now surpassed the S&P 500’s dividend yield for the first time since 2008. This alone makes stocks more unattractive compared to before. So far, this isn’t a big deal, but it could become one.
If short-term interest rates rise above long-term interest rates, we’ll then have an inverted yield curve. This would be a strong sign that a recession is coming about a year later and it would likely coincide with a major top in the stock market, and a bear market would probably follow — at least that’s what the historical record is telling us.
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At MoneyShow Pamela and Mary Anne Aden: We're in buy and hold. There still are some great tech stocks. We like industrials stocks, transportation. GE is a bit risky. Going with DIA ETF & QQQ.
