Change in Real 10-Yr Treasury Highest Since January

The nominal 10-year Treasury rate has been flat since March. And, with slowing inflation, the change in the 10-year Treasury rose to its highest level since January.

In October, the nominal 10-year Treasury rate was 0.79%, which was the highest the rate had been since March. However, this is still very near the lowest rate ever. It was the eighth month in a row and the eighth month ever that the monthly average was below 1%.

The real 10-year Treasury rate, which is the nominal rate minus the rate of inflation, was -0.60%. This was the 10th consecutive month and 13th of the last 15 that the real rate was negative. However, the rate was grinding slowly higher since April.  

In October, the year-over-year change in the real rate was -52 basis points. The change was negative for the 22nd month in a row. The change was at its highest level since January. Since April, the trend in the year-over-year change in the real 10-year Treasury was less negative. A less negative change in the real rate is less stimulating to the economy, which is not what the Federal Reserve wants.

However, the Federal Reserve has stated it will not pursue negative interest rates. Therefore, the only way for the change to be more negative is for inflation to increase, which is why the Federal Reserve has stated a new policy of average inflation targeting. This policy basically states that the Federal Reserve will allow inflation to run substantially higher than its target of 2% so that the long run average of inflation is 2%. However, the annual rate of inflation, according to the CPI, fell in October.

As much as the absolute level of interest rates, it is the relative change in interest rates that drives additional borrowing and spending. A falling change in the real 10-year Treasury rate tends to be a positive signal for durable goods manufacturing. Rising changes in the real 10-year Treasury rate tend to lead to contraction in durable goods new orders and capital equipment consumption by a relatively long period of time – historically, between 12 and 24 months. The rising change in the 10-year Treasury rate is a good leading indicator of contraction in housing permits, construction spending and consumer durable-goods spending as well.

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