This introduction is yet another repeat of recent monthly reports: interest rates have reached yet another record low and are moving towards a level that would have been considered impossible not so long ago. In August, German 30-year bonds rates fell significantly and ended at -0.175 percent.
So writes Chief Strategist at Sparinvest David Bakkegaard Karsbøl in his latest monthly report.
Although the direction of interest rate developments in recent years might seem justified, almost two decades in financial markets has taught me that no trend lasts forever. Bubbles often start because of sensible reasons that more and more investors take notice of. The trend then lasts so long that few can imagine that it will ever end. Finally, everybody thinks that IT shares or the housing market will always go up, or that interest rates will always be low or fall further. That is where we are now.
If we look at the interest rate on 30-year German government bonds, although these have fallen over the past 20 years from around 6.0 percent to the current level of -0.2 percent from time to time they have risen abruptly. Over this timespan they have risen by more than one percentage point seven times. This is an average of one rapid hike every three years, and funnily enough it is three years since the last rise started.
Another reason that we might have seen the bottom now is the fact that there is a very vocal overly pessimistic view, which is particularly related to the German manufacturing industry. Admittedly, this has suffered greatly from weak demand for cars and overly optimistic expectations for growth in production in relation to overall consumer growth a year ago. However, right now we are seeing the opposite so my assessment is that there will be a significant growth in the German manufacturing industry over the coming 12 months. This will affect inflation expectations and interest rates.
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