Trend in 10-Year Treasury Positive Sign for Manufacturing

In March, the year-over-year change in the 10-year Treasury rate was -52 basis points, which was fifth consecutive month the change declined and the third-straight month the change was below zero.

The nominal 10-year Treasury rate declined for the fifth month in a row, dropping to 2.57 percent from a high of 3.15 percent in October 2018. This was the lowest nominal rate since December 2017. The nominal 10-year Treasury rate is just above the Fed Funds Rate, which is overnight lending rate. It is quite unusual for the two rates to be so close together, indicating one of the two is “wrong.”

At the same time, the annual rate of inflation according to the CPI ticked up slightly from the previous two months. In March, the annual CPI was 1.86 percent, which was down significantly from its high of 2.95 percent in July 2018. The result was a real 10-year Treasury rate of 27 basis points, which was the lowest real rate since November 2017.

In March, the year-over-year change in the 10-year Treasury rate was -52 basis points, which was fifth consecutive month the change declined and the third-straight month the change was below zero. March’s change in the rate was the lowest since January 2018. This trend is a positive leading indicator for consumer durable goods spending, durable goods new orders, housing permits, and capital equipment spending.

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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