Low for long has been the mantra for the last 5 years… Some make the case that “long” has already come and gone and others have been saying “long” could last another 15 years!!!
The idea that either of these theories are right would be considered extreme. A look at why “low for long” is an important topic is essential before diving into either side of the argument.
Defining low for long
Interest rates hit the proverbial floor in 2008 and prompted, then Federal Reserve Board (FRB) chairman Ben Bernanke, to develop a more unique method of economic easing. So goes the birth of quantitative easing. Designed as a method to reduce interest rates on the longer curve, quantitative easing created more credit as borrowing was cheaper, stimulating housing, creating more jobs, and weakening the dollar. This last factor created a more competitive export situation for US companies. This also created improved profits for companies investing abroad as they would convert foreign currencies into more dollars.
Low for long – Obituary
While interest rates remain near all-time lows, upward pressure has made its presence known several times. As the FRB announced that it was going to start “tapering” the easing program the markets went through a taper tantrum… I wish I made that phrase up, but no chance… 10 year treasury rates increased more than 1% at that point. Since then a few other items have occurred spurring rates on, but they currently sit around 2.2% for the 10 year treasury. Obituary may have been a bit strong, maybe life support would have been a more appropriate reference.
Low for long – Young Adult
This current expansion has been very similar to past expansions in its basis of credit. Our current economy is very much so dependent on credit creation. The current rate environment exists as a result of over 30 years of credit dependence. There are some companies that believe that interest rates will remain low for long until our economic environment deleverages its own creation, debt dependence! How long is “long” in this scenario? It could be 15 – 20 years… Yeah right!
So why the balloon at the head of this article??? A bubble can be defined as an irrational exuberance within an asset class. The last 2 examples would be derivative mortgage instruments in 2007 and technology stocks in 2000.
Money continues to flood into bonds over the last several years keeping interest rates down, exuberance. While in some cases interest earned on some bonds have negative real return. It is likely safe to say that paying a company or sovereignty to borrow your money would be considered irrational. So buyer beware? No, buyer be responsible! Given the irrational behavior in some fixed income areas and the heavy inflows representing exuberance, a diversified approach to fixed income investing is imperative!
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