Thursday, May 31, 2012

Interest Rates At All Time Lows

QE3 Hits European Iceberg contains a historical chart on interest rates which covers the period from the 1870s to today. And what it reveals is that the rate on 10 year Treasuries has never been as low as today's rate. Not even close, in fact:

"A few months ago, investors might have thought that if Europe got decidedly worse, the U.S. Federal Reserve would launch another bond-buying program. Well, Europe sure is worse, but it has helped bring rates so low that further action would seem pointless.
The yield on the 10-year Treasury hit a record-low close of 1.63% on Wednesday. {NOTE: Down to 1.57% today} Data going back to 1798 show that there has never been a period when long-term government-bond yields have been even close to where they are now. . . .

The drop in Treasury yields is providing an important offset to any economic weakness stemming from Europe. First, they are dragging other borrowing costs lower. Conventional mortgage rates are at the lowest levels on record, and investment-grade corporate-bond yields are near the lowest levels since the 1960s. Second, the drop in yields is sending a message that the U.S. is a safe place to invest, bank and do business."


Even though most individual investors are doing just the opposite, we recommend that you stay away from buying bonds and other fixed assets, perhaps for as long as the next 30 years. That's what we're doing. But why mention 30 years?

No particular reason except it's a long time from now. And if you want some evidence for the 30 year guesstimate, just look at the chart and see how long it took from the ~1980 high of 15% to get to today's historic lows of ~1.5%.

So if it takes another 30 years to get even close to what rates were in 1980, then bonds won't prove to be good long term investments for a very long time. That's because in periods when rates are rising, bonds will do poorly.

On the flip side, when rates decline, as they did from 1980 until today, bonds appreciate in price. During those times, you receive both the interest and the increasing value of the bond. But as the chart so clearly reveals, today is the polar opposite of 1980 and the past 30 years. So plan and act accordingly.

We'll have lots of time to monitor future events, but let's expect rates to stay low for at least several more years as the world's economies, including ours, struggle to recover.

That said, look for the U.S. to be the "cleanest of the dirty shirts." And if we get some sensible behavior from our "public servants" in the next year, stocks could surprise on the upside. Wouldn't that be nice?

In any event, oil prices, commodities, interest rates and consumer prices should be very well behaved for the foreseeable future.

If you can stomach the volatility, that's not a bad time to own stocks of solid companies. And especially those strong U.S. firms that pay decent and growing dividends. It's not often that dividend yields are higher than interest rates, but that's the situation today. So take advantage of it the next several years at least.

Finally, we don't expect that inflation will rear its head anytime soon, but deflation needs to be monitored closely. So far, so good on that front, too.

We'll stay tuned.

Thanks. Bob.

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