Uh-Oh: It's A Low, Low, Low, Low-Rate World
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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» Magazine cover curse evaded--so far from Economics Unbound
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... [Read More]
Tracked on Mar 5, 2007 8:54:53 AM
Tracked on Jun 10, 2007 10:40:18 AM
Are the CPI's figures accurate and if so since when?
Posted by: Philippe | Feb 12, 2007 8:18:24 AM
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