Forget the 'new normal', says Montgomery

Forget the 'new normal', says Montgomery

Given that economists and markets consistently failed to predict the decline of long-term bond yields, investors should take the consensus view of "lower returns for longer" with a grain of salt, says Montgomery Investment Management.


In a new white paper titled Bond Rates, Montgomery Investment Management chief investment officer Roger Montgomery questioned the conventional wisdom that low interest are "here to stay".

"One shouldn’t really care what macro economists actually think because their track record is quite poor," Mr Montgomery said.

The consensus view on 10-year Treasury rates as expressed by the futures yield curve reveals that market participants, in aggregate, have been "about 100 per cent wrong" when predicting where future interest rates will be, he said.

"As rates fell, economists and the markets predicted they would rise and then flatten out," Mr Montgomery said.

A Blue Chip Economic Indicators comparison of 10-year Treasury rates with historical economist forecasts found economists expected yields to rise and then stabilise at between 5 and 6 per cent in 1996, 2000, 2005 and 2010. Instead, they have fallen steadily for over three decades.

Even in 2015 economists were predicting that bond yields will rise and flatten out at above 4 per cent.

"Both the Long Term Interest Rates: A Survey Report and [the Blue Chip Economic Indicators comparison] reveal that not only are experts poor at predicting long-term rates, they cannot reach a consensus explanation as to why rates have fallen as dramatically as they have," Mr Montgomery said.

"If these same experts are now predicting low interest rates are here to stay, should we be concerned rather than sanguine?"

"Hearing experts talk of a 'new normal' one cannot help but conclude such expressions are merely another version of 'this time is different' – arguably the most dangerous four words in investing," Mr Montgomery said.

Today, 10-year bond rates appear to be slowly marching higher, he said.

"It is currently our view that long bond rates are at the end of a 35-year decline coinciding with the end of an even longer-term expansionary credit cycle," Mr Montgomery said.

"We have gradually been building our cash reserves, retaining the flexibility to take advantage of lower prices in the future, if they transpire."

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