I
know it's hard to imagine that interest rates could go down. I talk
to clients every day who are – based on the news – getting
nervous about interest rates going up before they're able to buy a
property.
Every
Realtor I know is practically brow-beating their prospective home
buyer clients to, “HURRY, HURRY, HURRY! YOU NEED TO BUY NOW!
INTEREST RATES ARE GOING UP.”
The
problem is: They really don't understand the true relationship
between short-term interest rates and longer-term interest rates!
Here
are the facts …
The
benchmark interest rate has fallen from 2.64% on March 13… to
2.37%, as I write. (The "benchmark" interest rate is the
interest rate on the 10-year U.S. government bond.)
A
fall from 2.64% to 2.37% is a MASSIVE decline in a little more than
two weeks … So what's going on?
Here's
what we're seeing right now …
Bets
on higher interest rates have hit an all-time extreme, based on one
of my favorite sentiment measures – the Commitment of Traders (COT)
report… It shows the real-money bets of futures traders in dozens
of markets.
Like
most sentiment measures, the COT report tends to be "wrong at
the extremes and right in between"… but here's the thing:
Futures
traders tend to pile into a trade at the worst possible time.
Recently,
the bets on the benchmark 10-year Treasury bond in the futures
markets hit never-before-seen levels. Take a look:
Futures
traders are bullish… more bullish than they've ever been. That
tells me this is a 'crowded trade.' And crowded trades oftentimes
experience the opposite result of what everyone is betting on!
So
what could this mean for interest rates today? To find out, I looked
at what happened at previous record highs.
I
found that bets neared this extreme level only once before – in
March 2005.
Back
then, interest rates on the 10-year Treasury bond dropped from 4.6%
to 3.9% in less than three months. Here's what happened…
The
Fed was in the middle of raising short-term interest rates from 1% in
2004 to 5.25% in 2006. In 2005, futures traders thought it was easy
money to bet on long-term rates going up too. They were wrong!
This
is not a long-term prediction on interest rates. It is a short-term
prediction. In three or four months from now, I'll look at it again
to make my next prediction.
Bottom
line is, I wanted to share a great example – historical proof, if
you will – of what typically happens when investors are "all
in" on one side of a trade… In short, you don't want to join
them!
We're
seeing a lot of parallels to 2005… Back then, the Fed was in the
middle of RAISING short-term interest rates. Meanwhile, long-term
interest rates shocked everyone and started falling.
That's
exactly what we're seeing today…
Nobody
believed long-term interest rates could fall while the Fed was
raising interest rates… They didn't believe it in 2005. And they
don't believe it now.
As for me? I BELIEVE!
Give
me a call if I can help you with anything at all.
Ken
951-760-3833
KenAHall@gmail.com
