It is reasonable to suggest that interest rates might not have peaked. That statement applies to both short-term and long-term rates.
Currently, the discount rate on short-term Treasury bills is 4.13%. Long-term Treasury bonds are yielding 4.97%.
Only five years ago, short-term rates flirted with zero and the 10-year Treasury rate was less than one percent at .89%. The increase in rates since early 2020 is something to behold. The damage to bond prices is evident on both charts below...
TLT (Long-Term Treasury Bond ETF) 2020-25
TLT (Long-Term Treasury Bond ETF) 2002-25
The decline is well illustrated in the first chart, but I have included the long-term chart to add some perspective. I believe the severity of the decline is more apparent in the second chart.
From its high of 180 in early 2020, the TLT ETF has declined in price by more than 50%. This decline results from the increase in rates we have experienced over the past five years.
MAYBE NOT DONE YET
No matter the amount of collateral damage thus far and the potential for further harm to the financial markets and the economy, interest rates could go much higher. That is true regardless of Federal Reserve intentions. Here's why...
The Federal Reserve pursued a policy of abnormally low interest rates for nearly four decades. The Fed's action caused a misallocation of resources and inefficient use of capital, which distorted markets. Cheap and easy credit has become a way of life.
It wasn't always that way. Long-term historical averages for interest rates indicate a number somewhere between 6-8%. At 4-5% now, we are scarcely knocking on the door that opens to the lower end of the historical average range for interest rates.
HOW HIGH COULD RATES GO?
The answer to how high rates can go is mostly guesswork. But it might help to know high interest rates went during the inflationary 1970s. Those higher rates were not the policy of the Federal Reserve. They were the result of market factors stemming from a half-century of Federal Reserve inflation.
The effects of inflation and concern about the dollar's loss of purchasing power drove bond prices down drastically and interest rates up steeply. Bond investors demanded higher returns to offset the inflation risk inherent in holding a fixed-income security.
At one point, investors eschewed even the very shortest-term securities. Interest rates on short-term (1 year or less) U.S. treasury bills rose as high as 18%. The yield on 10-year bonds rose to 15%.
WHAT TO EXPECT
It is difficult to say with precision what might happen from this point, but investors would do well to consider the possibility that rates could go much higher.
That next wave higher could be triggered by a collapse in the credit markets. The credit collapse could propel the world economy into a severe economic depression.
Rates were previously forced to lower levels that were not economically efficient. The rates were held at those levels for too long. A cleansing of sorts has to occur before the economy can build any momentum that reflects real and lasting growth.
These thoughts are irrespective of any decision the Fed makes regarding the direction of interest rates.
Kelsey Williams