Another incredible observation of long term interest rates comes from Shiller’s database. The red line is the trend in long term interest rates. Interest rates peaked in 1981. That would have been an incredible time to buy bonds: their yields were 15%. But it was a terrible time to borrow money. Then interest rates declined dramatically- until now. Interest rates have been 2-3% lately, the lowest going back to 1880. At low interest rates, it’s a great time to borrow money, but a very risky time to buy bonds. When interest rates eventually go up, their values will go down. With rates at outlier low rates and the Fed going to need to taper their Quantitative Easing they’ve created to prop up the economy and stock market, the rise in rates in the years ahead could possibly be stunning. So the decline in bond values would be equally stunning. One of my advantages as a global macro manager is an understanding of how world markets interact with each other. The inverse relationship between bond price and interest rates is one of the few inter-market relationships that is a sure thing.
Source: Shiller’s database.
For more views on bonds, read Interest Rates Trend and Interest Rates are Trending Up, Bonds Investors Feeling the Pain