Kessler says he usually bases his interest rate outlook on the spread relationship to the overnight cost of money. He notes that the normal spread between the cost of money and, for example, the 10-year Treasury is 100 to 125 basis points, 1% to 1.25%.
Kessler sees the 1% rate as a possibility as well as a rate of 1.75% to 2.25% in the 30-year, noting that is where Japanese rates have gone. “The Japanese 10-year rate is 0.75% and the Japanese 30-year rate is 1.75,” he says
He also notes that the Fed is telling investors that they are keeping rates at zero until either 2015-plus or until unemployment or inflation change significantly. It’s theoretically indefinite, Kessler says. For Japan’s 10-year JGB, he notes, the low was reached 13-plus years after the peak (see “JGB at bottom?” below). “This is five years for us,” he says. “If you look at the low in the peak after the 30-year, the 10-year reaches a low almost 16 years after 1929.”
As for 2013, Kessler says, “[Treasuries] probably will be making new lows. And that, by the way, only would be an indication that the economy continues to struggle.”
He adds that those lower rates could hit in December if no deal is made on the fiscal cliff. Even while predicting lower rates, Kessler expects 10-year Treasuries to maintain a range of 1.25% to 2.25% over the next few months. In the long bond, he expects an upside of not much more than 3.25% in the next few months while they could go as low as 2.25%.