A long time ago, if one wanted to gauge the health of the US economy, one listened for the monthly housing report. Today, all the loud noise around the health of the US economy makes that report just one of many indicators to look at it when eyeing the health of the US economy. That’s fine, as one should look to many indicators, but one should not underestimate what a healthy US housing market will do for the overall US economy.
U.S. builders started work on more homes in August, driven by the fastest pace of single-family home construction in more than two years. The increase points to steady progress in the housing recovery.
Construction is up, sales are up, refinance applications are up, distressed home sales are down, and mortgage rates are at historic lows, again. Oh, I almost forgot. Oil is still dropping sharply as the fundamental reports today show supply and production up; yet gasoline inventories show a decline. Hurricane Isaac?
- How probable is it that the 10-year US Treasuries will be 3% or higher in 5 years? Just an “off the top of the head” hunch. A retiree is asking, as he positions his fixed income allocation for a term of 5 years out.
I love the above question. It speaks to a point I have been making to folks for several years now – the days of buy and hold are over. I love that people care about their money. It is one big reason I write this column. In any case, here are my thoughts.
I believe it is highly probable that yields on the 10-year US treasury will be 3% or higher in five years. One big reason is the US housing report today. Here is the simple way to look at this. If the economy keeps on improving (and it will) and the US housing market keeps improving (and it will), then you can expect interest rates will rise to keep both in line. Here is the complex view.
Interest rates will rise because the Fed controls them to a large degree. Five years from now, if the above happens (and it will), the Fed will have stopped quantitative easing, it will be bringing its balance sheet back into line, and it will have raised the discount rate. It will do all of this to keep inflation and the housing market in line, because as the economy improves, wages will rise (the core component of inflation), and the housing market will improve, perhaps dramatically (more buyers with money). The Fed understands no one wants excessive high inflation and no one wants a repeat of the housing market frenzy and collapse we just experienced. The way to control both is with higher interest rates.
Perhaps the most salient reason US Treasury yields will be higher is that as the global economy improves (and it will), the investment world will have given up US treasuries as the “safe haven” investment. With the Fed out of the US treasury market and investors out of the US treasury market, interest rates will naturally rise as demand lessens.
Everything I have just written is just one man’s opinion. Although what I wrote is plausible, it is not in concrete. Anything can happen, so take what I write as one source for you investment plans. Talk to others with experience in this area, and, most importantly, do your own homework. Learn how the system works.
Good luck and enjoy your retirement.
Trade in the day; Invest in your life …
