Wednesday, June 11, 2014
Remember the movie Groundhog Day? The film where Bill Murray lives in a world where no matter what he does, he wakes up to repeat the same exact day, every day. Being a fixed income investor, it feels like we have been living in this movie now for the past several years. Despite all that has occurred over the past few years, we are still waking up to see a continuation of very low interest rates.
It seems hard to believe, but the Federal Funds rate was moved to near zero percent in December 2008. So for 5 ½ years or 66 months running now, we have been staring at near zero interest rates on short-term investments. That is incredible when you really think about it. In that time period, you could have bought a new car, paid off the loan and started shopping for your next one.
Unfortunately, longer dated securities have not fared much better. Recently, a young portfolio analyst I met who was just starting his investment career stated he has never seen the two-year U.S. Treasury note yield above 1%. As depressing as that sounds, he was correct. The two-year Treasury has been below a 1% yield since May 2010. For a large group of people entering the industry, all they have experienced is historically, ultra-low interest rates.
There are many reasons that interest rates have been low for so long and probably will remain low for the foreseeable future. We can easily point fingers at the Federal Reserve or the sub-par growth economy. The fact remains, however, that there have been many hurdles to overcome in the financial markets, economy, and overall global environment. Those low interest rates have been in place to help resolve these hurdles and set us on a path for a more stable financial marketplace.
Five plus years has certainly been a long time to deal with low interest rates. While we are questioned constantly as to when rates are expected to rise, we need to be cognizant that it took over five years to get to this point. We simply cannot (and should not) expect interest rates to rise rapidly. The basic message of the aforementioned movie Groundhog Day was to learn from your experiences and try to adapt to new things. That message rings true in today’s markets, as we hope to wake up one day in the not too distant future from these historic low interest rates.