Since the financial crisis of 2008, we have seen interest rates come down and stay down. The fed, with their continuous stimulus programs have had much to do with keeping the long term interest rates at record lows, but one day this will all come to an end. As of this writing, the 10 year treasury is yielding 2.5%.
Economic growth is the first step towards the interest rate cycles move up. While we all want our economy to improve, this will eventually lead to higher interest rates. Why higher interest rates? Because roughly 70% of core inflation is wage inflation. The only way for us to get wage inflation is for the economy to start growing to the point where employment demand increases the costs. Additionally, there should be a wage blip coming due to the fact that minimum wage is being pushed up around the country, however we see this as a one-time inflation move.
Granite Group’s expectation is that we will not see the big growth this year that is expected by the big Wall Street firms as well as the Fed. However, with the fed continuing to pare back and eventually stop stimulus, interest rates have nowhere to go but up! Our best guess is that interest rates on the 10 year treasury should be in the 3% range by year end. As yields to go up, prices on fixed income instruments will have to come down.