Interest Rates Have Been Falling For a Long Time

Anyone who is trying to save or generate income off of their savings knows that interest rates are low.  Very low.  The graph below shows that interest rates have in fact been trending lower for about 30 years.

Now in our office anyone who comes in pitching their investment strategy (except maybe the traders) says that interest rates are going higher.  Fair enough; in fact I agree with such an assessment, but the question is when.

When looking at this chart I am reminded of an old article Dave Rosenberg wrote noting that interest rates cycles tend to last 22 to 37 years.  Further, Japan showed even with an exploding monetary base, the yield on their 10-year bond remained low and inflation remained tame as the private sector deleveraged. 

So while I do think interest rates will rise at some point, they won't necessarily do so in the near future. As the above paragraph points out, it could take some time.  So buy long dated bonds?  Not necessarily; I still don’t think you get compensated for the risk.

Thus, I think the best strategy is to stay short enough so you don’t get killed if interest rates rise, but go longer than cash so you don’t miss out on the higher income an upward sloping yield curve brings.  In other words, stay hedged for either outcome.