When the Labor Department reported on Friday, October 14, 2005 that consumer prices surged a stunning 1.2% in September, their biggest monthly gain in 25 years, bonds initially rallied as traders focused on the less-than-expected 0.1% increase in the “core rate,” which excludes volatile food and energy prices.

The very concept of an underlying core rate distinct from the all-inclusive “headline rate” of inflation originated during the last great commodities bull market, in the 1970s (30-year cycle), under former Federal Reserve Board Chairman Arthur Burns. After the Arab Oil Embargo caused crude oil prices to quadruple within months of its October 1973 imposition, Burns directed his economists to calculate a measure stripped of the resulting distortion. Next thing you know, food costs went berserk amid the effects of unusually harsh weather conditions on agricultural crops. The Fed couldn’t well afford to let such “weather-related” anomalies dictate policy, so it decided to omit those too.

A once-in-a-generation sea change

It’s only fitting that the last CPI (Consumer Price Index) reading this high it came at the end of an era. The historic waterfall decline in interest rates across the board since 1981 fueled the greatest wealth creation of all-time, sparking the productivity explosion and real estate boom. If you’re a homeowner with a mortgage, undoubtedly you are besieged with junk mail from brokers and mortgage companies that chase you down seeking your refinancing business. The velocity of the decline in interest rates over the past decade created a refinancing frenzy that led to a windfall for both borrowers and lenders.

All of our extensive data going back to 1600s England confirms that large-scale turns in the direction of rates take place on a multi-generational basis. The last historic top in bond prices (low in long-term interest rates) occurred in the 1940s. Before that, you must go back to the turn of the century to find the previous peak. Once a trend is established, it persists for a very long time. But now, signs indicate that we stand on the brink of a major shift. When bond and government-backed mortgage rates finally hit bottom, all rules of the game will change.

Importance of the 60-year cycle

You have to look to the 1940s (60-year cycle) for the most recent example of a bond bull market with longevity comparable to ours. The primacy of the 60-year cycle prompted us to remain bullish on bonds over the past decade. Bonds rallied off historic lows in both 1921 and 1981, shot up to important interim highs in mid-1943 and mid-2003, respectively, and then staged sizeable retreats into the following year, before reversing upward. Long bond yields came within almost a basis point (hundredth of a percent) of matching their June 2003 trough on June 3, 2005. Even as we called for a significant uptrend in commodities in 2001 after more than 20 years of lower prices, we were careful to differentiate between an increase in consumer prices, then up 108% since 1980, and appreciation in raw materials costs, down 47% in the same time period. A rise in the latter, without seriously impacting the CPI, would allow for simultaneous continuation of the long-term bull market in bonds.

The 1940s also represent the last case of a relationship between long- and short-term rates closely resembling the current one. In the aftermath of the Great Depression and throughout World War II the U.S. government pushed short rates to artificially low levels and kept them there. Consequently, once the climactic interest lows were in place, volatility in short-term rates far surpassed that of bonds. A flattening of the yield curve (spread between long- and short-term rates) preceded the concluding depths in long-term rates. Early in this decade, short-term treasury yields fell much faster than their long-dated counterparts, to a once unthinkable low of barely above 1% in March 2004, a far cry from the 15.78% that prevailed in May of 1981. This left the yield curve inordinately steep. The Fed proceeded to hike short rates relentlessly starting in June of last year, ratcheting its rate on overnight bank loans to 4% in a string of 12 successive credit tightenings to date. Still, long-term yields actually came down. The yield on 10-year Treasuries seemed to bump up against a temporary ceiling when it tested 4.5% in mid-October on the worrisome inflation news, compared to a range of 4.62% to 4.87% (4-5/8% to 4-7/8%) in the month when the Fed began cracking down.

If the extent of the subsequent rise in short-term rates and repeated hawkish statements emanating from various Federal Reserve members mean anything, short rates probably already bottomed. And if the 60-year cycle offers any guide, the interaction between short-term and long-term interest rates may well hold the key to identifying a top in bond prices that might not be seen again for decades, if ever

The implications of a final long-term low in interest rates are so profound that we’ve created an exclusive 3-part series of exclusive reports for subscribers only. You don’t have to be a bond trader to benefit. If you own a home or intend to buy one, the decision of whether to lock in a fixed rate is of paramount importance. If variable mortgages return to the 7.36% level seen just over 5 years ago, borrowers will only wish they seized the opportunity to lock in 30-year fixed rates. Otherwise, they’d find themselves on the hook for significantly higher mortgage payments, while also remaining at risk of continued increases.

Our exclusive series of reports tells you what this would mean for the housing market and also spells out how quickly we can expect rates to rise, based on our best historical model. This detail is particularly critical if you plan to stay in your home for a long time. Timing the ultimate low in rates can help you lock in long-term financing at the most advantageous price.

Fortunately, the lessons of both the 1940s, which saw a rate environment most like ours, and the 1970s, in which we witnessed our last bout of sustained commodity inflation, point to a similar conclusion about when we can expect the interest rate train to leave the station for good, and furnish surprising, potentially profitable information on what to expect in the interim.

A historic bottom in rates is an event that comes along only once or twice in a lifetime. Don’t risk missing out and having to wait a half-century or longer to take advantage of the next opportunity, check out our Complete Forecasting Service.

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About the Author:

James Flanagan is the president and founder of Gann Global Financial. In 1978, while majoring in economics at Claremont McKenna College, he acquired his first book written by W.D. Gann, “How to Make Profits Trading in Commodities.” This set in motion his passion to validate the claims of this early pioneer of market psychology and technical analysis. In April 1990, he launched his first newsletter Past Present Futures which has been in continuous publication since that time. James Flanagan oversees all of the research and research development at gannglobal.com.