Current State of Interest Rates

By Kevin Chambers

Since 2008, interest rates around the world have been kept incredibly low by governments and central banks. In the US, interest rates have been inching up the last couple of years. Globally, interest rates in the developed world are still very low, and in some countries have remained negative.

Source: Morningstar

Compared to the rest of the major economies around the world, the US Bond market is showing some nice yield. Payments from 10-year US bonds are paying around 2.5% right now. Compared to Germany and Japan, who are essentially paying zero interest for a 10-year bond, that looks pretty good. We are a far cry from pre-recession levels, but we are inching forward. The Federal Reserve is weighing a lot of different factors as they consider interest rate increases. It seems for now that they will not raise interest rates for the rest of this year.

The chairmen of the Federal Reserve have a tough, and important job. One that I’m not jealous of. The Fed must consider the impact of slowing the money supply as interest rates increase. Many individuals and business fund themselves through debt. Loans, for houses, business growth, infrastructure, all come at a cost. That cost is the interest they would have to pay on the loans. As interest rates rise, the cost of borrowing money increases. People will be more likely to not take on debt and the economy might slow down a little.

On the other side, they don’t want the economy to get ‘too hot.’ If there is too much money floating around, we could slip into an inflationary scenario. Where prices are increasing rapidly. A little inflation is good. Too much could be ruinous for our economy.

Selfishly for our clients, we would like to see interest rates rise. Pre-crisis, it was possible for a retired person who doesn’t want to take too much risk to put their life savings in a CD at the bank and live off the interest. Now that is basically impossible. Before the crisis, portfolio managers who build diversified portfolios had a base income from their bond allocations of 4-5%. They could add some limited risk and talk to their clients about a goal return of 7-8%. Hopefully, we can get back to those days, but it isn’t worth sacrificing the US economy to get there.