Thursday, May 9, 2013
The average 30-year-fixed mortgage rate recently fell to 3.35 percent, nearly the lowest in 60 years. For us savers, it was a sad day.
Low loan rates imply low deposit rates. My bank is offering one of the worst in the market: a standard one-year, $1,000 certificate of deposit at 0.03 percent. For the use of a thousand of my dollars, it will pay me 30 cents.
I don’t think it wants my money.
In the early 1980s it would have paid me more than $100. In a normal year it might pay $40 or $50. But 30 cents?
The yield on 30-year Treasury bonds is 100 times higher and still puny: 3 percent. Imagine what a 3 percent Treasury rate does to pension funds.
Consider the Washington State Investment Board, the successful manager of the pool of money that pays public pensions here. It earned an average of 6.37 percent a year on its fixed-income portfolio (only part of the pool) over the past 10 years.
Because of low rates, its fixed-income target for the next 15 years is 3.5 percent a year, says executive director Theresa Whitmarsh.
Why? It’s the Federal Reserve. “Monetary policy has trumped the fundamentals,” she says.
Alan Hess, professor of finance and business at the University of Washington’s Foster School of Business, says the cause is also weak demand.
Since 2009, the economic recovery has been the slowest in decades: Real per capita output has grown at a puny 1.3 percent. At that rate, business borrowers have not demanded much money.
James Grant at Grant’s Interest Rate Observer in New York, points out that interest rates are also “vanishingly small” in Canada, Britain, Germany and Japan. The principal cause of low rates, he says, is the “unimagined doses of money” injected by central banks around the world in order to stimulate recovery. (Has it? In real estate and the stock market, it has.)
Grant is a historian of interest rates. He says the last period with microscopic rates was World War II to 1951, after which rates went up gradually. This time, he worries that the shift won’t be gradual: “I say this will end badly,” he says.
Grant has been bearish before. In the mid-1990s he wrote “The Trouble with Prosperity,” a book arguing that the smoothing out of boom and bust cycles would turn out to be self-defeating.
Make people feel safer and they will take bigger risks and your ultimate disaster will be worse. His book seemed severe in 1996 and positively brilliant in 2008.
Whitmarsh, Hess and Grant all acknowledge that they cannot predict the future. But they can offer explanations that fit the facts, and outline some risks.
The risk of low rates ending badly was cited by America’s most prominent banker, Jamie Dimon, chairman and chief executive officer of JPMorgan Chase, in his April 10 letter to shareholders.
Dimon wrote that the massive creation of money by central banks is untested medicine that “may have severe aftereffects,” such as a sharp rise in rates when the effect wears off. Dimon noted that in 1994, a 3 percentage point jump in rates resulted in the bankruptcy of Orange County and other large losses.
He said Chase Bank has forgone significant current profit to position itself so that if rates go up by 3 percentage points, the bank will be $5 billion ahead. But he worried that the actual increase could be “even worse” than that.
Or even better. It depends on your point of view.
Bruce Ramsey’s email address is email@example.com.