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Here’s 222 years of interest rate history on one chart

Talking Numbers

Legendary technical analyst Louise Yamada looks at two centuries of US interest rate cycles and says we're at a generational bottom.

How far back should you go to chart interest rates if you want to know what kind of cycle we’re in?

Since this is Chart Week on Talking Numbers, let’s take it up a notch: How about since the 1790s? That’s exactly what Louise Yamada did for us. The founder of Louise Yamada Technical Research Advisors went back to the early days of the republic to see if there are any patterns to interest rates and what they can tell us about what’s next.

And, Yamada says now will see the start of higher interest rates for the next couple of decades.

(Read: It's Fed Day: Here's what to watch for)

Charting 222 years of US interest rates, Yamada see seven completed major periods lasting between 22 and 37 years. Three periods had rising interest rates and four had falling interest rates. She sees now as the start of the eighth period, which makes it the fourth rising interest rates cycle in American history.

For more recent data (1977 to today), Yamada uses the yearly close for the 30-Year Treasury bond. For data from 1790 to 1976, she uses prime corporate bond rates. All of her data are in nominal terms (that is, not adjusted down during inflationary periods or up during deflationary periods).

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Louise Yamada's chart of 222 years of interest rates

These interest rates are indeed interesting. For example, the average rate has been 5.18% since the start of this country’s history. “Any time we break above it, we get into trouble,” says Yamada.

When rates broke above 5% in the early 1970s, it began a sharp steep rise in rates coupled with inflation. The same was true in during the unstable 1790s and for a short time leading up to 1860. Rates didn’t break much above 5% in 1920; they stayed between 4% and 5% during the Roaring ‘20s only to sharply decline during the Great Depression.

(Watch: Crisis aftermath: Cure worse than the disease?)

And, while interest rates sharply reverse from its peaks, Yamada sees a two- to 14-year base of support for interest rates at the bottoms. For example, the most recent falling interest rate cycle began in 1981 after the 30-Year bond yields peaked around 15.2%.

Since then, “interest rates made lower highs until 2008,” notes Yamada.

Now, however, Yamada believes interest rates have formed their base and a reversal is in order.

Where does Yamada see coming up for interest rates and bonds given two centuries of history as a guide? Watch the video above to see how long-term technical analysis can give an indication of where nearer-term rates may be headed.


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