Chubby Checker had a big hit that you hear at most wedding celebrations. You know, dancing under the stick without touching it. “Limbo lower now, Limbo lower now, How low can you go?” It’s always a crowd favorite, usually played later in the reception when things are at full swing and, as you age, you realize it’s a dance to avoid. Most participants eventually end up on the floor generating that embarrassing photo.
We are sort of at that stage of the party with global central banks and their policies to control interest rates. How low can they go? Right now, if you want to buy a 10 year German bond, you will have to pay the government to borrow your money. That’s right, the yield on a 10 year German Bund is -0.70%. Japan’s 10 year bond yields -0.30% and Switzerland a whopping -1.08%. It is estimated that there are currently $17 trillion worth of bonds with a negative yield. As they say on late night television: ‘Wait, there’s more!’ The European Central Bank is expected to announce a major initiative to stimulate the European economy on September 12th with a new program to lower rates.
Back here in the US, the Federal Reserve cut short term rates by 0.25% in August and the market expects further cuts of 0.50% to 1 % over the next 12 months. Our longest term rates have also gone down dramatically with the 10 year US bond yielding around 1.5% and a 30 year bond under 2%. These lofty rates are attracting foreign buyers who figure getting back something on your money is better than paying someone to hold it for you. It has also supported dividend paying stocks as the dividend yield is higher than the interest they pay on their bonds.
These ultra-low rates make it tough for investors – especially retirees – to safely generate enough yield on their investments to live off of. The intent is to force investors to take on more risk. These policies have been a complete failure in Europe and Japan. Will the Federal Reserve get in line as the bar gets lowered again, or perhaps they’ll sit this dance out?
If you wish to discuss your portfolio, please call your adviser.