Here’s a chart I saw over the weekend comparing the current path of the US Federal Funds Rate (blue line) to the path of the Japanese Policy Rate (red dotted) 16 years ago.

fed-funds-vs-boj-rates

The United States is not Japan.  But our demographic structure today is very similar to Japan’s 15-20 years ago, and demographics ultimately drive everything.  We’re currently stuck in the awkward point between two of the largest generations.  We’ll eventually see a nice echo-boom from the Baby Boomer’s kids (the Millennials) but it’s still a few years out and then there’s another drop off after that.

population-pyramids-us-vs-japan

We’re seeing an eerily similar path in short-term rates because Central Banks are all run by the same academics that use the same theories and models and react to economic data with the same policies.  So while we’re very different in many ways, it’s not crazy to use Japan as a template for how the Fed is likely to respond if we remain stuck in a low growth, low inflation environment.  If that’s the case, the history of the Japanese investment markets says you probably want to own the longest dated bonds you can find.

Nick