Low for long is the mantra we hear often. The story being that interest rates will remain lower for an abnormally long period of time. Why is that?
Initially it was done to stimulate a failing economy during the recession… eight plus years ago. That was how we got there, but why have we stayed here? First, we should look at rates as they stand today. The Fed funds rate is hovering around 1.25%. The 10-year Treasury is sitting at 2.16% as of Friday. The Premium you get for giving them your money for 10 years is not much at all.
So, why is the 10-year rate so low? We need to exam interest rates for similarly ranked nations. The UK 10-year Gilt is 1.057% as of Friday, while the German 10-year Bund is 0.379%. You read that right, give Germany your money for 10 years and they will give you a whole 0.379%! Even worse, Japan is artificially keeping their 10-year note at zero bound in an attempt to stimulate lending.
With our peers running at incredibly low rates, the US seems rich at the top end of the range. Any hopes of breaking free and increasing the spread between the fed funds rate and the 10-year have been dashed time and time again.
Does this mean that we are stuck with low for longererer??? Not necessarily, but it would take fiscal stimulus to invigorate an economy that is just muddling along. That stimulus could give us the shot in the arm needed to amplify GDP, grow wages, increase spending, and finally get inflation where it needs to be. The unfortunate thing about all of that is if 10-year rates head north for this reason, the Federal Reserve Board will need to act to contain inflation. As a result, the fed funds rate will increase as well.
Also, improved economic conditions globally would push our peer rates up, hopefully increasing our ability to break out of this range. Again, this would likely come with the fed funds rate getting increased closely behind.
The other way the rate could go up? Oh yeah, people could just decide they do not want to buy US 10-year Treasuries anymore… Wouldn’t that be fun…
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