The 30-year fixed-rate mortgage in the United States is 6.1%. The 10 year US Treasury Notes are yielding about 4.6%.
Is that low or high? What is a "normal" long term interest rate, anyway?
This may not be the kind of question you spend your idle hours contemplating, but we do. We read all the time that "long rates are too low" and eventually they need to go higher. The logic is this: if rates are abnormally low, then they should eventually revert back to a more "normal" level. OK, maybe that makes sense…
…but just one problem: rates already are normal.
The chart below shows long term interest rates in the US going back about 205 years. Most Americans remember all too well the period spanning the late 60's on through the mid-80s. Those were times of high inflation and high interest rates. This makes sense because most adult Americans (particularly the Baby Boomers) lived much of their adult working lives in this era—and it's still pretty fresh in their minds. Many of us are used to higher rates and thus expect them to be higher than they are today for just that reason.
But the chart is very clear: only recently have we gotten back to average, or "normal," long term interest rates. (Indicated by the red-dotted line.) It's the period the Baby Boomers remember as normal that is actually weird.
Maybe rates will go up from here, or maybe down, or maybe just hang around today's levels for awhile. But whatever they do, the idea that rates have to move up just because it isn't normal is wrong. Reverting to the mean means staying put for long term interest rates.