Why aren’t rates better? Do you wonder that?
Do your clients ask the same?
Look to the bond market. Since July 2006, short-term rates have exceeded long-term — an “inverted” yield curve. Yield on the 10-year Treasury note fell from 5.25% in June 2006 to 4.50% in February 2007.
The yield curve often augurs economic events. In the past half century, it has inverted nine times. Eight of those instances preceded a sequence of economic slowdown, recession and Federal Reserve rate cutting.
“Why would long-term investors settle for lower yields while short-term investors take so much less risk?” asks SmartMoney.com. “The answer is that long-term investors will settle for lower yields now if they think rates — and the economy — are going even lower in the future. They're betting that this is their last chance to lock in rates before the bottom falls out.
“Inverted yield curves are rare. Never ignore them. They are always followed by economic slowdown — or outright recession — as well as lower interest rates across the board.”
The toughest time to sell stocks was when the market bubble burst earlier this decade. Now history shows that to also have been the best time to buy. Investors today are leaping for a ship that was at the dock in 2002.
The ship for fixed rates may be boarding right now. According to the National Bureau of Economic Research, the last recession ended in November 2001. If the inverted yield curve’s predictive value holds true, the next recession may loom.
When — it’s never “if” — it comes, look for the Federal Reserve to respond (some would say overreact) with rate easing. The current tightening ranks among the most severe ever. Chairman Ben Bernanke may wield an even heavier hand on the throttle.
When the best course of action becomes clear to all, the time to profit from it already has passed. If the current signal being sent by the yield curve is correct, the best time to lock long-term rate guarantees is at hand. Better is relative. Share the lessons of history with your clients now or risk hearing later: “Why aren’t rates what they were in March 2007?”
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