How does your quant model account for 10,000 year low interest rates?

How does your quant model account for 10,000 year low interest rates? Header Image

Many traders, myself included, try to use logic, math, and quantitative techniques to discover ways to make money in the markets. However what if our data taken from the past 10 to 30 years is skewed due to an over-arching market theme. This theme has been happening for so long, and is currently so pervasive, people assume it “has always been this way.” But what if recently this theme’s series of data points had gone to such an extreme that there was no comparable backtest to itself throughout all of human history, and therefore making almost all backtests, connected to every global market, to any symbol listed on any exchange, useless. How confident in our backtests could would be at this extreme? The theme I am referring to is the 10,000 year low interest rates.

Let’s look at a series of both long-term and short term interest rates.

Short term and Long Term Interest Rate Charts

Current (Long Term Interest Rates)

2009 – Today (Long Term Interest Rates)

1980 – Today (Long Term Interest Rates)

Current (Short Term Interest Rates)

2008 – Today (Short Term Interest Rates)

1980 – Today (Short Term Interest Rates)

Interest rates over generations

We can see even on the ultra-long term chart that only one time in our nation’s history did interest rates ever get as low as they were now. If we drill down even more we see these rates fall off to zero around 1932 (Great Depression) and don’t begin to move significantly over 1% until years after the war in 1948. Period of 15 years and a world war.

Discount Rates, NY Fed 1940s

Yields on Short-Term United States Securities, Three-Six Month Treasury Notes and Certificates, Three Month Treasury Bills for United States

Yields on Municipal Bonds, Highest Rating for United States

So at only one time in our nation’s history were interest rates pervasively low. Ironically as well this marked the bottom of the interest rate super cycle as it peaked out at 14% in 1980, where it has been falling steadily ever since.

Money Supply

We cannot see the M1 money supply at during the 1940s data, for it does not exist on FRED, but look at 2009.

M1 Money Stock:

During the 2008 crises when we saw the interest rate cycle hit its bottom, we see the M1 money supply go from 1.3T to 3.6T or increase by a factor of 3x.

M2 Money Stock:

M2 increases roughly by 2x over the same time.

A massive amount of base money has been created during the QE programs, mostly by ex-fed chairman Bernanke. Ultimately this is inflationary, yet its effects will usually take years (~10) to enter the economy to inflate prices in the broad market.

But let’s go back to this chart, which is the focus of this blog post:

21 countries have a negative interest rate (51%)

20 countries have a positive interest rate (49%)

Never in human history have interest rates been negative.

It fundamentally does not make sense. If you talk to a person on the street, they wouldn’t understand why or how something like this could exist.

The fundamental basis for finance is time value of money. A dollar today is worth more than a dollar tomorrow, because the dollar today can be invested.

Short term negative rates allow select borrows to “borrow for nothing” or “borrow for profit” from their respective central bank. Also it reduces the basis on debts because the interest paid on them is now negative so now debtors received payments (a tax on all savers) from those who hold the debt. It is a backwards system. Liabilities can become assets, and assets can become liabilities. Debt is perceived as an asset for the issuer!

This topic can expand to a whole other blog post in itself on explaining the nuances and negatives of negative interest rates (and why they are also immoral), but let me focus in on the sheer TIME aspect of this NIRP (negative interest rate policy).

Never in human history have collective rates been so low (this does not mean that borrowing is good right now either because a majority of people borrowing still pay ARM or adjusted rates or 5-6%, while very select people get this limited NIRP [negative interest rate policy] window). Also since the amount of time has passed assets prices have adjusted for these ultra-low or negative rates, so you can borrow, but still pay top dollar because the systems are leveraged to the hilt.

10,000 years is a long time

Since the first stone of the Pyramids of Giza was laid in 2560 BCE, interest rates were never this low.

The Great Pyramid of Giza: Last Remaining Wonder of the Ancient

Since the first stairs of the Daming Palace of the Tang Dynasty, a golden age in china’s history, were laid (618 – 907 AD), interest rates were never this low.

Aboriginal people at Wyrie Swamp near Millicent, 340 kms south-east of Adelaide, South Australia, use returning boomerangs to hunt waterfowl (10,000 BCE), interest rates were never this low.

Source: Timeline results for 3000 to 500000 - Creative Spirits

When men gathered and Wall Street was founded on March 8, 1817, never have interest rates been this low.

The above examples are meant to explain to show the breathe of time that something like this has never occurred; it is not natural. NO ONE KNOWS what will happen after this “experiment” in low interests is over, because there is no reasonable comparison in time when so many central banks have printed so much money and had interest rates so low; it has never happened, ever. What will the fallout be when the low interest rate cycle has ended?

Also, interest rates are much more influential than most people may think. They underpin the FV (Future Value) of all investments; capital equipment decisions; borrowing costs to short sell; investing in dividend paying stocks; real estate, automobile, and broad asset prices. This list can go on.

Almost every quant or trader trying to justify a position or trade through numbers uses backtested data. That data inherently contains a sampling bias because it lies all within a decreasing interest rate environment that has happened over the past 30 years, but especially within the last decade being dominated by ultra-low or negative interest rates which have NO HISTORICAL COMPARISON. Meaning, each quant or investor needs to ask themselves the question:


If the person answers you, they are lying. No one knows, and it matters because interest rates affect virtually every investment decision.

Final Thoughts

The reality is, no quant or logical based model can account for NIRP, because it hasn’t happened, ever, no valid backtest exists to compare it to. No one will know how this ends exactly until it inevitably does.

Traders that do not perceived the (extreme) interest rate super cycle we are in, and the subset of data derived from NIRP policies could be negatively impacted. This could prove that the strategies developed from the data from the past 10 years are bias because there can be no statistical correlation that can be made from it, because there is no past case of NIRP throughout all of human history.

In every trade there are winners and a losers, but it feels like we are winning right now, but then again, who is losing?



Interest Rate Controls: The United States in the 1940s

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