Five-hundred years ago, Christopher Columbus hadn’t been dead for long and Francisco Pizarro hadn’t decimated the Incas yet. The Pilgrims wouldn’t land in Massachusetts for another century. The paint was barely dry on the Mona Lisa, and the ceiling of the Sistine Chapel, while King Henry VIII had just established the predecessor to Great Britain’s Royal Mail service.
But according to bond investing legend Bill Gross, that was the last time in recorded history, that interest rates were as low as they are now. Analysts at Bank of America went back even further in a recent report, concluding rates haven’t been this cheap in five-THOUSAND years.
Let’s not quibble over basis points, though. The reality is, rates are cheap, cheap, CHEAP! Here in the U.S., the 30-year Treasury Bond yield just sank to 2.34%, only 10 basis points away from an all-time low. In Europe, bond yields are negative as far out as 33 years in Switzerland, while the yield on the benchmark German 10-year bond, just dropped below zero.
The key question for investors like you is…“Why?”
I see several reasons, the first of which is “Quantitative Failure” by the World’s Central Banks. They have printed $12.3 trillion in new money, cut interest rates more than 650 times, and bought everything from government bonds, to corporate bonds, to ETFs and REITs in order to prop up markets.
But those efforts have utterly failed to boost underlying inflation or create lasting economic growth. Or as the Bank of America analysts wrote, the “cocktail of QE, ZIRP and NIRP has been a potent one for Wall Street and the price of financial assets in the past eight years” but “there has been no ‘normalization’ of growth.” What’s worse, Gross believes the imbalances created by all this monetary madness have created a “supernova” that’s going to “explode.”
As a result, investors are worried and flocking to government bonds as a safe haven play. The latest batch of lousy economic data doesn’t hurt bullish sentiment toward bonds, either. Figures on retail sales, GDP, and especially employment all suggest to me that the U.S. is very late in the economic and credit cycle. Just one example: The U.S. created only 38,000 jobs in May…the worst reading in almost six years.
Even demographics play a role. As populations age in the developed world, investors are becoming less and less willing to take long-shot bets on high-risk stocks. They’d rather take their bonds, which at least promise return of capital even if it’s not much return.
There may even be some performance chasing at work. After all, the iShares 20+ Year Treasury Bond ETF (TLT) was recently sporting year-to-date gains of more than 12%. That was roughly quadruple the YTD return of the SPDR S&P 500 ETF Trust (SPY) – an inconvenient fact you don’t hear from the pundits on CNBC very often.
At some point, the great interest rate chase will end. Investors driving yields to the lowest levels since the 1,500s will get their comeuppance. But it’s going to take a resurgence in global economic growth, an end to the flight-to-safety bid for bonds, and actual success from Central Bank actions to bring about a real sell-off. So far, I just don’t see that in the cards.
Until next time,
Mike Larson is a Senior Analyst for Weiss Research, and is also the creator of the course “How to Profit From Rising Interest Rates”. A graduate of Boston University, Mike Larson formerly worked at Bankrate.com and Bloomberg News, and is regularly featured on CNBC, CNN, Fox Business News and Bloomberg Television as well as many national radio programs. Due to the astonishing accuracy of his forecasts and warnings, Mike Larson is often quoted by the Washington Post, Chicago Tribune, Associated Press, Reuters, CNNMoney and many others.