In our last posting on March 13, 2017, we said that the financial markets were widely anticipating that interest rates would increase. However, we persist in the belief that the leading indication of interest rate direction comes from watching the direction of the 3-month Treasury, which is a market driven instrument. As reflected in the chart below, we’re in for a bumpy ride ahead.
If the recent direction of interest rates is any indication since the March 2017 increase, rates are definitely going higher. Notice that unlike the lead up to the December 2015, December 2016 and March 2017 increases at 0.25%, there has not been a sustained level of the 3-month Treasury trading in a range.
From January 2015 to December 2015, rates were bound by a 0.05% cap, excluding the August 10, 2015 spike. Likewise, in the period after the December 2015 rate increased, the 3-month Treasury was in a range from 0.36% to 0.18% until November 2016. Though a short period of time, the November 2016 spike to 0.55% was sustained through early March 2017. Again, unlike prior range bound periods from 0.00% lows on the 3-month Treasury, the period after the mid-March 2017 rate increase has seen a sustained rise. This cannot bode well for rates overall and may suggest “stronger” action from the Fed. The only thing that can change the force of this move up is a sudden and unexpected (temporary) shock to the system.
The only question that remains is at what magnitude will the next rate increase be. So far, all indications, as seen in the chart below, are a first ever 0.50% increase since the zero rate lows.
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