Macro View: Restricted Room For Higher Rates

Global CIO Commentary by Scott Minerd

“As the U.S. economy continues to expand in 2013, long-term interest rates should continue to rise from their present levels. There appears to be a cap, however, on how much rates will be able to rise in the near-term. Given the adverse effect of a rising interest rate environment on the housing market, the Federal Reserve will almost certainly seek to keep long-term rates at a modest level for the foreseeable future. As a result, it would be difficult to conceive of the 10-year note rising above 2.25% within the next few years. Although an increase to 2.25% may not seem significant, that is more than 20% higher than what the 10-year note is currently yielding. Concerning the effect of rising rates on economic activity, credit spreads are likely to continue to tighten despite any rises in rates, meaning the impact of rates backing up will be fairly muted.”

Changes in Interest Rates and Home Mortgage Applications (1990 – Present)

Mortgage applications have historically been highly sensitive to changes in interest rates. The chart below highlights the relationship between changes in U.S. 10-year Treasury yields and home mortgage applications. Typically, periods of rising interest rates hamper mortgage applications, and consequently reduce the volume of home sales. Given this relationship and the Fed’s emphasis on supporting the U.S. housing sector, it appears unlikely the Fed will allow interest rates to rise materially in the near-term.

Foreign Markets May Offer More Growth Potential

Economic Data Releases

Solid Employment and Housing Data Overshadowed by Fiscal Cliff Concern

Recent labor market data was encouraging, with initial jobless claims falling to 350,000 for the week ending December 22nd. This reduced the four-week moving average to a four and a half year low. Continuing claims also fell. New home sales rose 4.4% MoM in November to 377,000, while pending home sales rose 1.7%, both reaching the highest levels since April 2010. However, the positive employment and housing data did not translate to an improved consumer sentiment, as the December Conference Board Consumer Confidence dropped for a second month to 65.1, likely reflecting concern over the Fiscal Cliff. The December ISM manufacturing index rose more than expected to 50.7 from a three-year low in November, with improvements in regional manufacturing indices in Chicago and Milwaukee.

European Manufacturing Continues to Contract, China Growth Accelerating

Mortgage applications have historically been highly sensitive to changes in interest rates. The chart below highlights the relationship between changes in U.S. 10-year Treasury yields and home mortgage applications. Typically, periods of rising interest rates hamper mortgage applications, and consequently reduce the volume of home sales. Given this relationship and the Fed’s emphasis on supporting the U.S. housing sector, it appears unlikely the Fed will allow interest rates to rise materially in the near-term.

Important Notices and Disclosures

This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author’s opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. ©2015, Guggenheim Partners. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.