Real 10-Year Treasury Rate Falls for Second Month

The recent drop in the 10-Year Treasury rate may be a positive leading indicator for the manufacturing industry.

The nominal 10-year Treasury rate has declined for the fourth month in a row, dropping to 2.68 percent from a high of 3.15 percent in October 2018. This was the lowest nominal rate since January 2018. At the same time, the annual rate of inflation according to the CPI has dropped, too. In February, the annual CPI was 1.52 percent, which was down nearly 50 percent from its high of 2.95 percent in July 2018. The result was a real 10-year Treasury rate of 34 basis points, which was just 3 basis points higher than last month.

In February, the year-over-year change in the 10-year Treasury rate was -47 basis points, which was the second straight month the change was below zero and the lowest change since January 2018. It’s quite possible that the change in the 10-year Treasury rate has reversed course and is now a positive leading indicator for manufacturing, durable goods and capital equipment. 

Changes in the real 10-year Treasury rate tend to lead capital equipment consumption by a relatively long period of time – historically, between 12 and 18 months. The change in the 10-year Treasury rate is a good leading indicator of housing permits, construction spending, consumer durable-goods spending, durable goods new orders, and capital equipment spending. A decreasing year-over-year change in the real 10-year Treasury rate should lead to increases in all of these data points down the line.

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