It’s hard to wrap your head around just how low U.S. interest and bond yields are—still are—a decade after the Great Recession ended. Year after year, prognosticators said that rates were bound to go back up soon: Just be ready. That exercise has proved to be like waiting for Godot.
Thirty-year mortgage rates are a fraction of long-run averages, and companies too are paying very little to borrow. All that cheap money has been helping the economy along. On the other side of the ledger, bank depositors are getting paid only a fraction of 1% on their savings.
The longevity of low rates has upended long-standing assumptions about money and reshaped a generation of investors, traders, savers, and policymakers. The Federal Reserve has tried to push the U.S. into a higher-rate regime, raising rates nine times since 2015, when the key short-term rate was near zero. But now the central bank appears ready to reverse course and start cutting again when it meets at the end of July.
Anne Walsh, chief investment officer of fixed income at Guggenheim Partners, says there’s been “a paradigm shift of epic proportion for investors.” Not only are short-term rates low, but long-dated bond rates are minuscule, too, suggesting that investors see little likelihood of rates—and the economic conditions they reflect—changing anytime soon.
Borrowers of all kinds have been clear benefactors of this sea change, with many nations and companies locking in low rates for as long as a century. Belgium and Ireland have sold 100-year bonds, as did Austria this year at a yield of 1.171%. In 2015, Microsoft Corp. sold 40-year bonds and the University of California issued 100-year debt. Subdued rates have also buffered the U.S. Treasury from rising interest costs on the federal debt.
Individuals have had to get used to earning paltry rates. The national average rate on savings accounts is 0.10%, little changed from four years ago and down from 0.30% in 2009, according to data from Bankrate.com. In 2000, well before the financial crisis, the rate was 1.73%.
The problem is the same for institutions that manage savings on behalf of others. Pension funds, overseeing trillions in retirees’ future cash, have been ratcheting down return expectations. The 30-year Treasury bond, a favored debt security, yields about 2.5%—compared with an average 6.5% since the 1970s. Even a record rise in stock prices hasn’t solved the low-return problem for pension funds, because many of them cut their allocations to equities after the financial crisis.
Where low rates really bite isn’t in current returns but in the future gains investors can reasonably expect. Interest rates set a kind of baseline for the return on all assets. As they fall, bond values rise and stocks often do, too. But once rates have settled at or near rock bottom, there’s less room for that kind of price appreciation.
While some Fed officials wish they could get back to more-normal rates, so they have more room to ease again in the future if they need to fight a downturn or fresh financial crisis, they seem to have their hands tied. For all the problems low rates may cause, policymakers see them as a stimulant to growth. Although unemployment rates are very low, the economy took an agonizingly long time to recover from the financial crisis. And now a slowdown in global growth and headwinds from Trump’s trade war have made risks to U.S. output too strong to ignore.
The surprising persistence of low rates has even quietly reordered the hierarchy on Wall Street. Hedge fund managers may still be glamorous on shows like Billions, but in real life they’ve had to fight to retain clients. Partly that’s because many hedge fund managers thrive on volatility, and in a world where the dreaded spike in interest rates has never arrived, there’s been too little of that for them. The long fall in rates has made it easier so far to earn money with simple investments such as stock and bond index funds. Meanwhile, cheap financing costs and rising asset values have been a boon for private equity firms. Investors have committed about $4 trillion to them in the last decade, according to data from research firm Preqin Ltd.
In 2009, bond powerhouse Pacific Investment Management Co. saw all this coming, when they dubbed their multiyear investment outlook “the new normal” and predicted lower long-term yields. They saw the same issues the Fed and central bankers around the world are grappling with now: slow growth, a combination of technological innovation and low-cost global labor that eases inflationary pressure, and a glut of savings as the populations of rich countries age. Looking ahead, with many of those 2009 factors remaining, “the new wrinkle is concern around global trade and countries looking more inward,” Pimco Group Chief Investment Officer Dan Ivascyn says. “Yields can absolutely go a lot lower.”