When the 10-year Treasury yield briefly dipped under 3.10% on an intraday basis one day in June 2003, some thought a milestone had been set that would last for years, even decades. But suddenly there’s reason to wonder if the era of low rates is poised for renaissance.
The immediate cause for such thinking comes from looking at yesterday’s action in the bond market. The 10-year yield closed at 4.47%. That’s the lowest close this year, as our chart below shows.

That may come as a surprise for some, although in the broader context of history it doesn’t look out of place. As our second chart below illustrates, the longer history has been one of falling interest rates, interrupted only by temporary jumps higher. The latest jump upward has been unusually long. But is it temporary? Or is the longer trend of falling rates reasserting itself once more?

It’s been popular to look at the trend since the low of June 2003 and conclude that the era of cheap money has ended and that rates will slowly but inexorably rise from here on out. The prediction has more or less held true in the last four years or so. But after yesterday’s dip, one might take a minute to reassess the implications for portfolio strategy if rates take a turn south in a big way.

The questions are all the more relevant given the economic climate of late. Many on Wall Street expect that the Federal Reserve will soon lower its key Fed funds rate by 25 basis points to 5.0%. In fact, Fed fund futures are priced in anticipation of Fed funds falling to 4.50% by January.
Much of the support for forecasting lower rates rests on the belief that the economy is weakening, perhaps by more than a little. So far, however, there’s not much statistical support for the darker predictions. This morning’s update on weekly jobless claims, for instance, continue to hover in a range that’s prevailed for months. In fact, new applications for unemployment benefits dipped for the week through September 1 to 318,000–down from the prior week and roughly unchanged from a year ago.
The primary catalyst for thinking that the economy still faces serious headwinds is real estate. On a range of measures, the residential property market in particular continues to suffer, suggesting to some analysts that it’s only a matter of time till the pain spills over into the general economy. The thinking here is that consumer spending will take a hit once the sobering trend in housing (i.e., lower prices, fewer buyers) takes a negative toll on Joe Sixpack’s buying habits.
That, at least, is the theory. The jury’s still out, although the bond market seems close to coming to its own private verdict, namely, the economy’s headed for rougher waters. The bond ghouls have been wrong before, of course. What’s more, it wasn’t that long ago that many economists were predicting that the worst of the real estate bust was behind us. Nonetheless, pessimism seems to have the upper hand–again.