Terms

Interest Rate
Yield

The interest rate is how much a person/entity pays to borrower money from a lender.

More About Interest Rate

Asset Classes

Fixed Income

People

Jim Grant

Mentioned by the Following

Asset Classes

Fixed Income

Entities

Federal Open Market Committee
Chicago Board Options Exchange
Quill Intelligence
TG Macro LLC
Macro Intelligence 2 Partners

People

Jim Grant
Walter Bagehot
Richard Sylla
Evan Lorenz
Paul Volker
Christopher Whalen
Lacy Hunt
Greg Diamond
Steven Hochberg
Peter Kendall
Ivelin Zhelev
Pamela Aden
Mary Aden
Ramon DeGennaro
Kevin Muir
Dan Rasmussen
David Kotok

Publications

Inside The Yield Book
A History of Interest Rates
The Snowball
Aftermath
One Up On Wall Street
Global Forecast Service
Global Market Perspective
The Aden Forecast
Gary Shilling's Insight
The Daily Dirtnap
The Macro Show

Strategies

Debt Restructuring
Global Macro Strategy

Terms

Inflation
Black Scholes Model
Structured Note
Derivative

Wisdom

John Bull can stand many things, but he can't stand 2%


Why are Interest Rates Important?
  • They are the traffic signals of investment
  • They measure time preference
  • They calibrate risk
  • They set investment hurdle rates
  • They have a huge impact on:
  • They can fuel or crate prices of other assets like stocks and real esate
    • Low rates tend to increase the price of other assess as they become cheaper to finance and reduce discount rates
    • High rates tend to decrease the price of other assets as they become expensive to finance and increase discount rates 
Interest Rate Forecasting
  • Forecasting interest rates is extremely difficult - there are countless factors
  • Some consider it to be impossible
  • Central banks often try to forecast interest rates, but are proven incorrect over time

What Determines the Interest Rates

  • Short and long term interest rates are driven by different forces
    • Long-term rates are usually higher than short-term rates (more uncertainty)
  • Rates can be driven by Central bank Actions
    • Short term rate adjustments
    • Quantitative Easing (asset purchases) to drive long-term rates
    • Forward Guidance (Telling the markets what it plans to do)
  • Interest rates tend to move in long-term cycles:
    • 1900 - 1920 rising interest rates & inflation
    • 1920 - 1946 falling rates 
    • 1946 - 1981 rising rates
    • 1982 - 2016???? (end dates still tbd) falling rates
    • Interest Rate Cycles are Natural:  People first consume more than they can produce (rates go up), then later they have to pay it off (rates go down)

What Drives Short-Term Interest Rates


What Drives Long-Term Interest Rates


US Historical Interest Rate Levels (Short Term Fed Rate)

  • Rates generally rose in the 1960s and 1970s
  • Rates mostly above 2.5% from 1960s to 2010
  • Rates mostly above 5% in 1970s and 1980s
  • Rates jumped to 10% - 19%+ in late 1970s and early 1980s
  • Rates started to decline around 1980 into 2016 (end still TBD as of 2018)
  • Rates at historical lows from 2010 onwards (after great recession and FED QE Programs)


  • Historically 10 year yields  have traded inline with GDP growth (relationship stopped after 2008 crisis & QE Interventions)