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We are in an interest rate environment where rates rise after a long period of low rates. We can use other historical periods to help understand how long rates will be normalized into a standard yield curve and how the rates may end up looking based on past performance.
During the 1970s, the United States experienced a period of high inflation, which led to significant increases in interest rates. The Federal Reserve implemented a series of interest rate hikes to combat inflation, which eventually brought it under control. However, interest rates took several years to return to normal levels.
Based on this historical period, we can infer that interest rates may take several years to normalize into a standard yield curve after a period of low rates, such as the one we’ve experienced in the past decade. Additionally, the magnitude of the rate hikes and the ultimate level of interest rates may be influenced by factors such as inflation, economic growth, and monetary policy decisions by central banks.
The 1970s provided a valuable historical reference point for understanding how long it might take for interest rates to normalize and how rates may end up looking based on past performance. However, it’s essential to note that each interest rate cycle is unique, and the current environment may not mirror the 1970s entirely.
Our analysis using the 1970s as a guide indicates that interest rates will be significantly higher than today. Given that mortgage rates are tied to the ten-year Treasury Bond, all economic stakeholders must be aware of the implications of these higher rates. Here is an example of possible rates over the next 1 to 3 years based upon inferring a correlation between the ’70s and today.
It’s essential to note that predicting future interest rates is not an exact science, and various factors can influence them. However, based on the historical comparison to the 1970s, we can make some predictions for the 1-year, 5-year, 10-year, and 30-year treasury rates in 1 and 3 years.
In 1 year:
1-year treasury rate: 5.0%
5-year treasury rate: 6.2%
10-year treasury rate: 6.5%
30-year treasury rate: 6.8%
In 3 years:
1-year treasury rate: 5.5%
5-year treasury rate: 6.7%
10-year treasury rate: 7.0%
30-year treasury rate: 7.2%
These predictions are based on the assumption that interest rates will continue to rise as they did during the 1970s. However, it’s crucial to remember that historical performance is not always an accurate predictor of future outcomes. Factors such as inflation, economic growth, and monetary policy decisions by central banks can also influence interest rates.
The fact that mortgage rates could be potentially 2 to 3 points higher than today and would mean 30-year rates in the 8 to 10% range can potentially dampen the economy and the American standard of living. We hope this will not become a reality. Still, in the spirit of caution, we believe our readers should be aware of this eventuality, particularly as most media pundits and economic prognosticators predict interest rate cuts this year in the face of rapidly rising oil prices.
