How low are interest rates? They are so low that the government is now considering offering 50-year bonds to capitalize on current low rates. The theory would be investor demand for a 50-year bond because of the likelihood that at some point (over the next three or four decades) inflation will return. One can imagine a 50-year bond being priced at an interest rate payment, based on current rates, of 2 or 2 1/2%.
It just goes to show you how crazy interest rate conditions are right now that this is even in consideration. Japan and Germany now have negative yields and the 10-year US treasury is paying a fraction of what it used to pay. Apple recently announced it was issuing bonds as well to capitalize on the current low interest-rate environment.
You see a theme here? Companies and governments are attempting to take advantage of current low interest rates. We believe that one should be very careful before locking in for 50-years at a low interest-rate. This would likely be a fiscal marriage that you’d be required to see all the way through; separation from this asset when interest rates are higher would mean losing money.
Why is all of this happening? Deflationary pressures including low international wage rates, technology innovation, and struggling global growth are certainly providing the environment for low interest rates.
Importantly, we believe that high deficits are also contributing to lower economic growth as a bigger percentage of the economy is focused on debt repayment. Just this week the US deficit for the year hit $1 trillion. I know deficits are boring, but it really does matter; not only for economic growth, but for the future for our children and grandchildren.
CNN posted an interesting article on the 50-year bond under consideration. In that article they stated:
Treasury Secretary Steven Mnuchin on Thursday floated the idea of the US government issuing an ultra-long government bond next year, if there’s demand.
“We are looking at issuing a 50-year bond, what we could call an ultra-long bond,” said Mnuchin during an interview with CNBC’s “Squawk Box.” “We think there’s some demand for it and that's something we'll very seriously consider for next year."
Historically low interest rates hovering between 2% and 2.25% could make this an attractive time for the Treasury Department to pursue such a proposal, but Wall Street has had a tepid response so far.
Long-term investments typically pay more interest than short-term ones, making them potentially good bets for investors. But the yield curve has recently inverted, sending longer-term Treasury yields below short-term bonds. That means people would have to take less interest over the long-haul, making them potentially less attractive than in normal situations.
Source: September 12, 2019, CNN.com article by Donna Borak
It’s a crazy world. We are in uncharted territory related to fixed income and interest rates. As conditions develop and evolve, DWM will continue to monitor and adjust. We have already taken action to adjust our strategy based on the current interest-rate environment. We are now actively debating the next steps we will take going forward into 2020.
Any questions, as always, please let us know! Hope you’re having a great week!