Over the past couple of years I have gone out on a limb and stated unequivocally that U.S treasury rates will not rise any time soon. While all the pundits keep predicting that The Federal Reserve Chair Janet Yellin will raise the federal funds rate, I’ve consistently said whatever action she takes is relatively unimportant to five and ten year treasury rates.
Shown below are a few examples of what I’ve said:
- May 16, 2015 – “So will we (the U.S.) follow the European example and see negative rates on U.S. treasuries anytime soon? Not a chance. But it will keep downward pressure on our treasury yields. Even if The Federal Reserve decides to increase interbank interest rates as predicted by the pundits, I doubt that will offset the hoard of Europeans buying our bonds. S. treasury rates should remain low for the foreseeable future, possibly lower.” The 10 year treasury rate at that time was 2.15%.
- July 29, 2015 – “Federal Reserve Chair Janet Yellen has been hinting, maybe, kind of, sort of slowly raising the federal funds rate by the end of this year. Assuming she comes through, would raising rates on the short end of the curve mean the long end will follow?… Long term interest rates are influenced by the law of supply and demand. In recent years we’ve had runaway budget deficits (a huge supply) that has been met with equal or even greater demand for our treasuries from European and Japanese investors who see treasuries as a safe haven for excess cash… If you listen very carefully, you will hear a giant sucking sound coming from the U.S. absorbing the excess cash from all those investors around the world wanting our treasuries.” The 10 year treasury rate at that time was 2.29%.
- February 5, 2016 – “I believe The Fed will have no choice but to stop raising interest rates on short term money… How long will negative interest rates affect commercial real estate in the Pacific Northwest? I think long term, U.S. bonds are headed lower. This means interest rates will continue to slide… You think we’ve got low interest rates now? It’s only going to get better.” The 10 year treasury rate at that time was 1.83%.
- April 1, 2016 – “Now I know what you’re thinking, “What happens when treasury yields go back up? Won’t investors have paid too much for these low cap rate properties?”… But I don’t believe your initial premise. I don’t see interest rates rising to previous levels…” The 10 year treasury rate at that time was 1.77%.
Why over the past year have I predicted lower U.S. treasury yields? Have I been reading articles that support that prediction? Not really. Why am I willing to stick my neck out when almost all the pundits have been predicting higher rates? It’s simple. I believe that people do things out of self-interest.
If you are a Japanese or European investor and need to park your excess cash somewhere, are you going to invest it in your own country’s negative interest rate bond or will you invest in a U.S. treasury bond that has a modest 2% return? And if the dollar is appreciating in value in comparison to your country’s currency, all the better. Instead of receiving a 2% return on the bond, your return also includes the amount of the appreciation of the dollar (called arbitrage). In 2014, the U.S. dollar appreciated about 14% compared to a basket of currencies; last year the dollar appreciated about 8%. So instead of getting, let’s say a 2% return on their bond, in 2014 they got a 16% return; in 2015 they got a 10% return. So which would you choose if you were them? A negative interest rate where at the end of the bond term you receive less back than what you invested or would you rather invest in a U.S. bond (the safest investment in the world) and get a double digit return? Seems like a no brainer to me? Doesn’t it to you?
Wall Street Article
So when I read an article in the Wall Street Journal last week titled, Weak Returns in Rest of World Drive Investors Into U.S. Bonds I took notice. The article began with this quote: “The global hunger for U.S. government debt is intensifying as investors seek better returns from the negative yields and record-low rates found in Japan and Europe.” To that I say, “Duh!!” I know I’m breaking my arm to pat myself on the back but sometimes I just have to crow a little. It’s likely at some point in the future I won’t be crowing instead I’ll be eating crow when one of my predictions turns out horribly wrong. And when that happens I hope I have the integrity to admit I was wrong, but for now imagine me strutting around my office. This lowly commercial mortgage broker outguessed most of the world’s economists.
The article went on to say that 70% of U.S. 10-Year Treasuries are now purchased by foreigners compared to about 20% ten years ago. As long as the demand for U.S. treasuries exceeds supply, treasury yields will continue to decline. The 10 year treasury rate at that time of this writing was 1.56%.
Sources: Weak Returns in Rest of World Drive Investors Into U.S. Bonds, by Min Zeng, Wall Street Journal, June 10, 2016; Cap Rates Too Low? Heck No! Find Out Why, by Doug Marshall, marshallcfblog.com, April 1, 2016; 3 Myths about the Inevitability of Interest Rates Rising, by Doug Marshall, marshallcfblog.com, July 29, 2015; Why Interest Rates in Europe Are Negative And Will It Happen Here?, by Doug Marshall, marshallcfblog.com, May 16, 2015; and Negative Interest Rates – Coming to a Bank Near You, by Doug Marshall, marshallcfblog.com, February 5, 2016.