Investor Appetite For Bonds In A Tepid Recovery Weighs On Rates

[interestrateripoff]

http://www.nytimes.com/2010/08/09/business/economy/09rates.html?ref=business

Just how low can interest rates go?

Rates keep falling, and Wall Street increasingly seems convinced that they will stay low for years. But it isn’t the Federal Reserve that is cutting them — it is the bond market. The weak-kneed economy has investors piling into United States Treasury securities, driving prices up and yields down.

The stampede into bonds is lowering the rates on things as diverse as home mortgages and corporate loans. The two-year Treasury rate sank to a record low on Friday, briefly edging below 0.5 percent. Thirty-year fixed-rate mortgages have fallen below 4.5 percent — another record. And, with clouds gathering over the economic recovery, the Fed is expected to hold its benchmark rate near zero this week.

All of this is good news for people borrowing money, but bad for those saving it in bank accounts and money market funds. The average one-year certificate of deposit now pays 1.3 percent a year. Such meager returns are particularly painful for people living on fixed incomes.

But rates are unlikely to turn higher soon, economists say. In fact, they could fall even further. While the Fed cannot lower its official federal funds rate much more — that rate has been stuck at 0.25 percent all year — it can ease credit in other ways.

On Wall Street, a consensus is forming that the Fed might take less conventional steps, like buying more Treasury securities, to push market rates lower still.

Ward McCarthy, the chief financial economist at Jefferies & Company and a longtime Fed watcher, said he expected the Fed to formally acknowledge that, in the words of its chairman, Ben S. Bernanke, the outlook for the economy is now “unusually uncertain.” Given the glum outlook, the Fed will probably take other steps to ease credit, like reinvesting proceeds from its holdings of mortgage bonds and Treasuries into short-term Treasuries, Mr. McCarthy said in an e-mail.

Market rates have already dropped precipitously this year. The 10-year Treasury yield — a benchmark for a wide range of loans and one of the most closely watched rates in the world — has fallen by more than a full percentage point since early April. It dropped further on Friday, to 2.82 percent, as disappointing news on employment added to the worries about the economy. The rate is still above the 2.06 percent nadir touched in December 2008, in the depths of the financial storm.

William H. Gross, a managing director at Pimco, the giant bond fund manager, said the jobs report strengthened his argument that the economy and the job market would remain weak for the next few years. He calls his unhappy situation “the new normal” for the American economy.

“Currently, financial markets have accepted this thesis, the best evidence of which is the two-year Treasury yield at 0.50 percent,” Mr. Gross said in an e-mail. “If investors expected the Fed to raise rates at any time in the next two years, the yield would be much higher.”

Like Mr. McCarthy, Mr. Gross expects the federal policy makers to consider other steps, besides lowering rates directly, to try to revive growth. The Fed, for its part, will probably keep the fed funds rate at 0.25 percent for two to three years, he said.

Goldman Sachs economists said in a research note on Friday that they, too, think the Fed will respond to the weak jobs market with another round of unconventional easing. “These measures could involve more asset purchases — probably Treasury securities,” the economists wrote. Those purchases could total at least $1 trillion, they said.

Lower and lower rates may eventually encourage corporations to invest the big stockpiles of cash in plants and equipment. That, in turn, could lead to new jobs. But if companies instead sit on their hands, waiting for sure signs of an economic revival, basement-level rates may not do much to spur the economy. The latter, Mr. Gross said, amounts to “waiting for an economic Godot.”

But even if companies do not regain their nerve, bond investors will profit, since bond prices will keep climbing.

The bond crowd has done much better than stock investors lately. Since early May, the price of 10-year Treasuries has jumped about 6 percent. The Standard & Poor’s 500-stock index, by contrast, has fallen about 4.3 percent in that time.

I wonder if these economists who are predicting low rates are the very same economists who failed to predict this financial crisis?

If inflation destroys capital investment, companies aren't going to invest. The only way to move forward it to take the pain and deflate, once at the bottom the economy will recover and will have rebalanced.

[Meat Puppet]

http://www.nytimes.com/2010/08/09/business/economy/09rates.html?ref=business

I wonder if these economists who are predicting low rates are the very same economists who failed to predict this financial crisis?

If inflation destroys capital investment, companies aren't going to invest. The only way to move forward it to take the pain and deflate, once at the bottom the economy will recover and will have rebalanced.

I have asked this question before, but how is this possible in a democracy? I could see the Chinese, who are willing to massacre their own protesting citizens by the millions, pulling it off. But it seems to me it will be a long drawn out alternation of QE and false dawns with no possible solution decades on.

[interestrateripoff]

I have asked this question before, but how is this possible in a democracy? I could see the Chinese, who are willing to massacre their own protesting citizens by the millions, pulling it off. But it seems to me it will be a long drawn out alternation of QE and false dawns with no possible solution decades on.

I think the problem is the politicians have been plying the public with happy pills for decades promising everyone a golden egg, the public love being told they can have what they want trouble is it doesn't work like that and everyone has to live within their means.

Having a correction in a democracy is very difficult.

[whoami]

There is no recovery from deflation. That's why politicians and economists are so afraid of it.

The only way out of a real deflation is an externally applied reset and restart - which is why war, revolution or invasion is usual answer.

Edited August 9, 2010 by whoami

[Bloo Loo]

There is no recovery from deflation. That's why politicians and economists are so afraid of it.

The only way out of a real deflation is an externally applied reset and restart - which is why war, revolution or invasion is usual answer.

nonsense.

deflation always ends when there is excess MONEY in peoples pockets, and CREDIT is wiped out.

thats why it is a cleansing of the excesses of the Boom....by the way, you cant have a boom without a bust...you can disguise the bust, but you cant stop it....thats because its not money that changes...but wealth creation

[whoami]

Deflation always ends when there is excess MONEY in peoples pockets, and CREDIT is wiped out.

Good luck with that theoretical drivel. I think you might need it soon.

[R K]

Can't be long now until China are begging the US to take their money and paying them to do so.

This can go on until China fixes its business model, which doesn't look imminent, or the US tell them to swivel, thanks for all the ipods, and brings production back home, which I hope is rather more imminent.