Macro Analyst Sees Negative 5 to 10 Percent Real Interest Rates on the Horizon

The United States has experienced a collapse in real rates in recent months, meaning that inflation is greater than the nominal interest rate. 

The yield on 10-year Treasury Inflation-Protected Security (TIPS) bonds is negative 1.04 and has hovered around negative one percent since August. 

“We’re experiencing the first global sovereign debt bubble in 100 years,” said Luke Gromen, founder and president of Forest for the Trees LLC. “When a sovereign debt bubble bursts, governments only go bankrupt if they decide to not print money, and, historically, the number of governments with a fiat currency that have decided to basically shrink themselves to avoid printing fiat currency, it’s a very short list. They almost always print.”

Printing more money means inflation, and, eventually interest rates will respond. As inflation rates rise, bond holders are likely to sell to avoid losing money. 

“The problem is that interest rates rising in the midst a sovereign debt bubble makes the government’s fiscal position worse, because now they have to pay more interest on their really big debt pile, and that puts them in a worse position,” said Gromen, “which means they have to print more to pay off interest, which sends interest rates higher, and it turns into a debt death spiral.”

Negative real rates help to explain gold’s recent rally from the March 2020 lows, as investors move into stores of value assets like real estate, precious metals and bitcoin as a hedge against riskier assets. 

“There are just a lot of symptoms of this happening, and I think there would appear to be a hierarchy of assets benefiting from this,” said Gromen. “I think at this point, Bitcoin has been on top in terms of performance, but I think it’s all being driven by the same dynamic, which is this bursting global sovereign debt bubble.”

The general consensus seems to be, Gromen said, that real rates bottomed out around negative 1.1 percent in August, but he sees them dipping lower. 

“I think at a very minimum, before this is all said and done, we’re likely to see negative real rates in the U.S. of negative five percent to negative ten percent, and I think they could be lower than that, potentially,” said Gromen. 

Gromen emphasized that while there is no formula to predict the exact rate, there is history. He points to post-World War II America, where real rates dropped to negative 14 percent. 

“Directionally, I look at it and say ‘we’re in a worse position than we were during World War II, and we saw negative 14 percent then,’” said Gromen. “Is it really possible that the bottom was negative 1.1 percent? I suppose it’s possible, but it strikes me as highly unlikely.”