Uh-Oh: It’s A Low, Low, Low, Low-Rate World

Damn! Now I have to go sell all my Bonds!

From the current BusinessWeek:

"Wait a minute—weren’t long-term interest rates supposed to be a lot higher by now?

When the rate on the 10-year Treasury bond plunged from 6.5% in early 2000 to an average of 4% or so in 2003, the explanations were easy: tech bust, recession, weak capital spending, low inflation, steep rate cuts by central banks around the world. The low rates seemed perfectly normal—and sure to reverse on a dime when conditions changed.

Since then, plenty has changed. The Fed has hiked short-term rates by more than four percentage points. The global economy grew by 5.1% in 2006, the second-strongest performance in 25 years. Europe and Japan have recovered. Even tech spending seems to be on the rise, judging from Cisco Systems Inc.’s (CSCO ) strong earnings report on Feb. 6. And yetand yet!—10-year Treasury rates have risen only three-quarters of a percentage point. Real rates, which adjust for inflation, have barely budged.

It isn’t only a U.S. phenomenon. Ten-year euro bonds are yielding around 4% today, no higher than in 2003, despite much faster growth in the region. Real rates in the euro zone are up only a bit.

Borrowers, of course, are deliriously happy. Even the shakiest companies are seeing their debt costs plunge. The spreads on triple-C rated bonds and lower—the junkiest of junk—are at a record low 4.7 percentage points over ultrasafe Treasuries, compared with the previous record of 5.2 percentage points in 1997, according to Merrill Lynch & Co. (MER )

Most remarkably, the craziness isn’t likely to stop anytime soon. The low cost of capital is probably going to last "five to seven years," says Samuel Zell, who as chairman of real estate firm Equity Office Properties Trust (EOP ) watched bidders wield cheap debt in a fight over his company. (Blackstone Group, with a $39 billion bid, won out on Feb. 7.) James W. Paulsen, chief investment strategist at Wells Capital Management (WFC ), sees an even longer horizon: "This could be a prolonged cycle where the cost of capital is low [for] 10 or 20 years."

It is, indeed, a low, low, low-rate world."

We’ve discussed the impact of these sorts of magazine covers before. The most reliable are the general interest press (Time, Newsweek, etc.). We  have seen some uncanny peaks and valleys from the Economist, Businessweek, Forbes and Fortune before.

For more on the magazine cover indicator, see any of these prior posts.


It’s A Low, Low, Low, Low-Rate World
Michael Mandel and David Henry
BusinessWeek, FEBRUARY 19, 2007 http://www.businessweek.com/magazine/content/07_08/b4022002.htm

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What's been said:

Discussions found on the web:
  1. Philippe commented on Feb 12

    Are the CPI’s figures accurate and if so since when?

  2. Francois commented on Feb 12

    He he!

    See The Triumph of Contrarian Investing by Ned Davis. Fascinating chapter on magazines’ cover and onward performance.


  3. Craig commented on Feb 12

    Ah yes… as I recall in 1999/2000 it was liquidity from retirement investments. This time it’s supposedly international liquidity. I think that means that printing presses are working overtime in all languages.

    Another sign….remember Y2K? I actually heard someone mention the Vista upgrade and the “Triple play” as the Y2K equivilent.

    Isn’t Y2K Chinese for SELL?

  4. lewis commented on Feb 12

    Numerous stories today quoting the S&P “global yield curve” (examples
    and http://www.marketwatch.com/news/story/sp-tells-why-investors-neednt/story.aspx?guid=%7B65E4DFCC%2D1C3F%2D4432%2D980F%2D7214DEFA5DC6%7D ) basically saying its now a global yield curve, don’t worry about the US inverted yield curve. And yes, its a global low, low, low, low yield curve, even those none of the articles I have seen actually display it (anybody have it?).


  5. Uncle Jeffy commented on Feb 12

    Just curious – has anyone checked the trend toward lower 10-year rates against the Fed’s holdings of 10-year (or thereabouts) Treasuries? I’m wondering if this is how Ben Bernanke is trying to soften the ARM rate resets that people will face in the coming year, by putting pressure on 10-year yields in the hope of keeping the cost of switching to a 30-year fixed-rate mortgage relatively lower than it might have been otherwise.

  6. lapaipatoka commented on Feb 12

    dont worry guys just play 5%-4% UST-10y this year and u gonna be very happy :) good luck

  7. j commented on Feb 12

    What happens if Business Week does a cover story on the cover story effect? Meta-effects?

  8. j commented on Feb 12

    What happens if Business Week does a cover story on the cover story effect? Meta-effects?

  9. scorpio commented on Feb 12

    FT or WSJ today (cant remember which) had headline “Bernanke Keen to Reassure Markets re Goldilocks”. that about sums it up. since when was it his or Greenspan’s job to “reassure” capitalists? what’s he so worried about? i could understand it if in fact yield spreads on junk & emerging markets were out at 2002 levels, but they’re tighter than they’ve ever been. where they sposed to go, Ben?

  10. Patu commented on Feb 13

    magazine cover index? dont be fooled. its your reticular activating system working overtime in your brain. Becasue of the 1974 newsweek cover “the death of equities” this anachronism took root. Studies since then show how unreliable it really is. But we all remmeber that 1974 cover.

  11. HARM commented on Feb 13

    Let’s also not forget Time Magazine’s June 2005 cover: “Home $weet Home”, which, if not marking the absolute peak of the RE bubble, came darned close.

  12. gab commented on Feb 13

    When did Sam Zell become an expert at prognosticating interest rates? My old boss used to say, “Even God can’t predict long bond rates!”

  13. Jonathan J. Miller commented on Feb 15

    Barry – I was sent a blue version of the cover for my subscription rather than the red copy you used for this post. Do you think the contents are customized for Republicans and Democrats?

  14. angryinch commented on Feb 18

    If Sam Zell is so sure that cheap capital is going to last another 5 to 7 years, why is he selling property in the U.S. instead of loading up the wagon?

    Sam’s no fool. He knows that cheap capital doesn’t necessarily trump valuation. Borrowing money could be free—it nearly is today—and property prices may still stall or decline. Ask Japan about that.

    From what i’ve read, Zell is looking overseas and investing in markets that haven’t run to the sky already (not many of those left). He believes that returns will be meager going forward and the best returns are available offshore. Zell won’t be buying property in the U.S. at a 4 cap rate anytime soon.

    It’s a classic transfer from smart money to dumb money. The dumb money in this case are the pension funds, 401k’s (soon to be 201k’s) and so forth. Once this process is complete, the bagholders will be the ones to suffer during the next major downturn. Same as it ever was.

  15. Economics Unbound commented on Mar 5

    Magazine cover curse evaded–so far

    About four weeks ago I (together with my co-author David Henry) wrote a cover story for BusinessWeek entitled “It’s a Low, Low, Low-Rate World: Why money may stay cheap longer than you think”. We closed the article the evening of…

  16. icebergfinanza commented on Jun 10

    UN NUOVO CAMBIAMENTO CLIMATICO: Il progressivo esaurimento della sorgenti della liquidità:Illusione o realtà?


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