Uncharted Territory - The Climb Back to Normal Interest Rates
A question we receive often from clients is "what are normal interest rates and when will we see them again?" Of course, since the recent recession the concept of normal has been lost in the broad-based efforts by our Federal Reserve to stimulate an ailing economy. For the most part, these efforts have worked. Now we must follow the steep and possibly painful climb back to normal interest rates. Yesterday we saw the yield on the 10-year US Treasury fall to as low as 2.53% - this compares to a long run average of about 6.0% and pre-recession level of about 5.0%.
The link below is to an informative article entitled "Will Normal Rates Hurt Returns?" This article suggests that a target 10-year yield of 5.0% is reasonable, but, will it come over a 3 or 6 year climb? Linking the 10-year yield to the Fed Funds rate (currently at just 0.25%) means that when the Fed does begin raising short term rates (tightening) to get back to a level of 4.0% is a long way to go - the steeper or more dramatic the increase(s) we see (beginning in mid 2015?) the more hurt we may see in returns. The fact that this is completely uncharted territory for the Fed may mean that the ride could be an interesting one!
