Fueled by decreasing interest rates and inflation, the current bond bull market has lasted over 35 years. Yet since Trump’s election in November 2016, interest rates and inflation have risen markedly, leading many prominent economists and traders to speculate that the end to this long term trend is finally at hand. Given the enormous public and private debts that have been accumulated at exceptionally low rates, the question of what happens next is paramount to governments and investors alike. We first discussed the spike in interest rates since the November election here and most recently posted this interview with interest rate expert Jim Grant on this exact subject.
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Here to weigh in on the future of interest rates is Hoisington Investment Management Executive Vice President Lacy Hunt.
Mr. Hunt points to dramatic decline in the velocity of money, a topic we first discussed here, as evidence that the low in interest rates has not yet arrived.
Mr. Hunt notes “The rate of growth in money and the velocity determine what happens to nominal GDP. The federal Reserve really has not been able to accelerate monetary growth because the economy is extremely over indebted and also, because we are over indebted, the velocity of money continues to fall. Last year we had a particularly sharp decline in the velocity of money and the growth rate in nominal GDP was less than 3%… We have too much debt and too much of the wrong kind of debt. The debt is undermining productivity growth, population growth, making economic performance poor, holding the inflation rate down and when the inflation rate declines bond yields continue to move lower not higher.”
As to whether the recent uptick in inflation is meaningful, Mr. Hunt notes that “What determines inflation is whether there is an expansion of nominal GDP and nominal GDP continues to sag under the weight of our over indebtedness,” concluding “We think that the secular low in long term treasury bond yields is well ahead of us not behind us”
There is more to the interview so enjoy the video below:
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