Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Point/Counterpoint: The Case for Low Interest Rates

EconomyAug 15, 2020 07:08AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

By Liz Moyer and Peter Nurse

Investing.com -- U.S. Treasury yields soared in the middle of last week, with the yield on the benchmark 10-year note closing Wednesday at 0.761%, its highest level since early April.

These yields have slipped back since, and the trend has been lower for more than 30 years. But investors may have to start thinking about higher yields going forward. After all, how much lower can they really go?

Investing.com's Liz Moyer explains why rates will stay low, while Peter Nurse offers reasons for their inevitable rise. This is Point/Counterpoint.

Low Rates Will Stay Low

Stock markets continue to climb despite a lack of evidence that the economy is making a strong comeback after Covid-19 lockdowns forced businesses to close and lay off millions of workers. There are still millions of people unemployed, though jobs have started to come back. And businesses are still struggling to rebound from the shutdowns, and many mom and pop operations face permanent closure.

In March, the Fed slashed rates to zero and took other emergency actions to try and supercharge the flailing economy. After losing nearly one-third of its value during the spring, the S&P 500 has retraced its move to approach its Feb. 19 all-time high.

Sure, interest rates are bouncing back from lows. In the mortgage market, 30-year fixed rate loans averaged a rate of 2.96% this week, up 0.08 points from the previous week. The 15-year loan average rate was 2.46% from a record low.

But something else is going on. People have been focused on the concept of negative real rates, which is what you get when you take the interest rate and factor inflation into it. During the last two months, as Barron's recently noted, the real rate of the 10-year Treasury dropped from negative 0.36% to negative 1.05%, which makes it the lowest in nearly 18 years.

Treasury data show negative real rates across the spectrum. The real rate on the five-year was negative 1.24% as of Thursday. For the 10-year, it was negative 0.96%, and or the 30-year, it was negative 0.30%. This is as reflected in the yields of Treasury Inflation Protected Securities.

The trend could explain some other phenomena in the market. Gold soared to fresh highs above $2000 in recent weeks (it gave some of that back this week). Gold is seen as a store of value, and investors may be flocking to it because it doesn't cost them money to hold, as bonds with negative rates would.

And gold's counterpart, the U.S. dollar, has fallen relative to other currencies. Negative real rates also make the dollar less attractive compared to others.

Negative rates could also help explain the rally in risk assets like stocks. If investors want to earn a return, they are better off putting their money in the stock market rather than notes at negative rates, which, again, cost money to hold.

Massive fiscal stimulus programs and bond buying by the Federal Reserve are driving rates lower. In ordinary times, this would encourage companies to make big capital expenditures. But a Covid-weakened economy means businesses are holding off on spending, the opposite of the government's goal of spurring growth.

Richard Koss, an economist and the chief research officer at New York mortgage data fintech firm Recursion, explains that the virus is a supply shock, which is unsettling the natural order of things. Car sales are down over last year while car prices are up, for example. Supply chains are messed up.

The economy is undergoing secular shifts like working from home and e-commerce "we can barely start to understand," Koss says. "Huge adjustments have to be made to the new era, and transitioning to the new resilient world will be costly."

That "doesn't support a big increase in yields."

Low Rates are Set to Rise

Last week's move up in yields was driven by both repositioning ahead of big issuance this week and a sense that the U.S. recovery is broadening and looking more robust, said NAB strategist Rodrigo Catril, in a note to investors earlier this week.

"That is reflected in the rotation in equities into more cyclical sectors and plays into the idea that U.S. Treasury yields should be higher, reflecting that improvement in prospects for the global recovery," he said.

This week saw better-than-expected employment data and increased supply with a massive $112 billion debt sale.

Hefty auctions will become regular occurrences given the U.S. budget deficit climbed to $2.81 trillion in the first 10 months of the budget year, the Treasury Department said Wednesday, exceeding any on record. This deficit has to be financed somehow.

Similarly, solid employment news continued Thursday with the number of Americans seeking jobless benefits dropping below one million last week for the first time since the start of the Covid-19 pandemic in the United States.

In a separate report on Thursday, import prices increased 0.7% in July, driven by higher costs for fuel. This follows sharply on the heels of data this week showing consumer and producer prices accelerated in July, dispelling fears of deflation.

While the slowdown is by no means over and the employment situation could still get worse given the renewed lockdowns imposed in a number of states on the back of the second wave of the coronavirus, the Federal Reserve must be encouraged by the latest economic data.

And there’s still the potential for the political impasse in Washington to be overcome and another stimulus program launched.

That may not look likely at the minute, with both sides seemingly preferring to play the blame game rather than make any serious moves to break the deadlock. But neither will want to go into the election campaign running the risk of being blamed for the continued pain in U.S. households.

A number of Fed speakers have tried recently to impress upon the policymakers of the need for more fiscal largesse, hoping Congress will do more of the heavy lifting.

Talk of negative interest rates at the next meeting of the Federal Open Market Committee, in the middle of September, has largely disappeared, with Chair Jerome Powell dismissing the possibility on a number of occasions.

That said, the central bank could seek to depress longer-term rates to keep borrowing costs cheap as the U.S. continues to work its way through recovery. It could do that either through forward guidance (by stating its intention to keep rates near-zero until inflation or unemployment reaches certain targets) or yield curve control (where the Fed purchases Treasuries until bond yields are below a stated level). 

The Fed chose not to do so in July. Deciding not to do so in September would likely result in yields rising across the board.

Point/Counterpoint: The Case for Low Interest Rates
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (5)
Jay West
Jay West Aug 16, 2020 1:14PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Will banks rally after FOMC confirms interest rates will not go negative on Wednesday?
Belinda Davenport
Belinda Davenport Aug 16, 2020 11:55AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
I am glad last year a got a long term CD that was at 2.25% Hopefully by the time it matures these rates would of went up. Also I have to improve my trading capabilities with the money I had available for day trading.
Jay West
Jay West Aug 16, 2020 11:55AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
I did the same for my children. Now I swing trade with LEAPS in BAC.
Ioannis Lazaridis
Ioannis Lazaridis Aug 16, 2020 12:28AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Quantitative of easing started in Japan in late 80s and continued till today . Negative interest rates first time in Denmark then in Sweden then in Eurozone countries. After those experiences we saw that nothing terrible happened to peoples everyday and finance life. Covid-19 just accelerated the times for the implementation of the same program in USA.
Jermaine .A
Jermaine .A Aug 15, 2020 3:05PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Fed will keep all rates low for as long as they can. They'll forcibly rise when the dollar starts to get cremated.
Franco Dominguez
Franco Dominguez Aug 15, 2020 11:41AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
its obvious that interest rate must increase, but its like the retail rate that is low. Of course, all the people was lockdown in that period of time
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email