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By New_Deal_democrat December 21, 2016 11:36 am
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Interest rate spike says slowdown not downturn -- for now

[Note:  I am having a problem inserting graphs.  I will update as soon as I am able.]

[UPDATE: Until XE fixes the problem, you can see the graphs here:

http://bonddad.blogspot.com/2016/12/the-post-election-interest-rate-spik... ]

[UPDATE 2: Problem is resolved.]

The biggest economic story since the US Presidential election has been the backup in long term interest rates.  Post-Brexit in July they hit some all-time lows, with the 10 year Treasury yielding as low as 1.36%.  At one point last week they yielded as high as 2.64%.

Does this portend recession?  Not yet I think.

What has been remarkable is how similar the spike in yields has been to the "taper tantrum" of 2013.  Here's a look at 10 year Treasuries (red) vs. 30 year mortgage rates (blue) since the beginning of 2009:


Note that while the correlation between the 2 interest rates isn't perfect, it is pretty darn close.  Further, interest rates as of now are much closer to their highs since the recession than their lows. Hence my rating of them as negatives in my Weekly Indicators columns.

So next, let's compare mortgage rates with single family housing permits.  I am choosing this housing metric because it is much less noisy than others while being very leading.  Here's what we see since the recession (Note: I've inverted rates so that higher rates show as lower and visa versa, to more easily show the correlation):


Pay particular attention to the late 2013-2014 period that followed the taper tantrum.  The increasing trend in housing permits came to a nearly complete halt -- but did not turn down, thanks in large part to demographics, as the large Millennial generation has been entering the market.

For the record, when we take this relationship back half a century, we see that typically in the 1970s and 1980s interest rates had to increase by 2%, or even 2.5% or more, before there was an outright downturn in housing (again interest rates are inverted).

The taper tantrum is my template now.  If interest rates do not exceed the 3.04% yield they set as a high then, most likely the back-up in yields just portends a slowdown.  If they exceed 3.46%, it is much more likely that they portend a downturn in housing -- and a subsequent downturn in the economy as a whole.

We're not there yet.
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