How to Estimate Future Treasury Interest Rates
- 1). Look at the current consumer price index (CPI) and producer price index (PPI), which measure inflation at the retail and wholesale levels. Typically, if the CPI or PPI is higher than expected--regularly issued forecasts present reasonable expectations--treasury bond prices will likely decrease, driving up yield. If CPI and/or PPI are below expectations, an economic pullback is likely at hand. Below-expected growth or recession sends money flowing to "safety" such as Treasuries. The increased demand will likely reduce Treasury yields.
- 2). Examine unemployment rates. In recessions, unemployment rises. To stimulate economic activity, the U.S. Federal Reserve bank injects liquidity into the monetary system, which typically makes treasury rates decrease. Rate decreases encourage spending and capital investments. Low Treasury rates mean that savings are less attractive and that investing in economic activity---such as hiring---becomes a better business option. Eventually, rates will rise as economic activity picks up.
- 3). Compare the stability of the U.S. government with other major economic powers. For example, international political turmoil reduces number of "safe havens" for cautious investors who want to preserve--and modestly grow--their capital with minimal risk. With the U.S. one of a dwindling number of reliable borrowers, increased demand depresses Treasury bond yield. Of course, if international turmoil is too broad and too severe--and pinning down how much is "too much" is an imprecise art--US yields could skyrocket along with other nations as the market melts down.
- 4). Calculate likely growth of the national debt. Eventually, high debt will dictate higher Treasury bond yields. National debt devotes increasing amounts of tax money for interest payments. Politicians and economists may lack the foresight--or will, or courage--to cut spending and raise taxes sufficiently to control overall debt. If national debt spirals out of control, market logic will eventually make the correction to high enough yield on government debt. This is what happened recently with Greece. There is no fundamental reason the same thing cannot happen in the U.S.
