The Daily Reckoning UK

Pathetic News On Interest Rates

Ben Traynor

by

Posted 13th March 2017

We have passed a milestone.

You can now buy 10-Year Swiss government bonds at a positive yield for the first time in nearly 18 months (a tip-of-the-hat to the Bond Vigilantes blog for flagging this up).

More on this historic news – and the wider issue of pathetically low returns – below.

First, I should probably acknowledge that it’s shaping up to be a rather big week on the news/noise front.

You may have missed it because it hasn’t been dribbled over absolutely everywhere, but the government may finally trigger Article 50 this week.

Months of phony war will finally be over.

Then, on Wednesday, the Federal Reserve will raise interest rates.

I say “will”. Obviously I can’t guarantee it, but after weeks where interest rate futures implied this wouldn’t happen, they’ve swung around to suggest the Fed almost certainly will hike rates this week.

And is if that weren’t enough, we also have:

  • The Dutch election on Wednesday, which are getting feisty, to put it mildly;
  • Interest rate decisions from the Bank of Japan, Bank of England and Swiss National Bank;
  • Nicola Sturgeon pushing for a second Scottish referendum;
  • PLUS Australian New Motor Vehicle Sales data (swoon!)

However, I’m aiming to keep my bletherings about all this to a minimum, for three reasons.

First, I’m not keen to dive feet first into a crowded trade. There will be countless outlets this week for those who want to gorge at the trough of hot takes and forced, paid-for opinions.

As someone who happens to be nursing a sore throat at the moment, I appreciate the merit in not trying to shout above a crowd.

Second, and more prosaically, we’re moving offices this week. It means I’m not sure I’ll be able to send anything out on Thursday or Friday.

My keyboard will be in a box, on a van. Our internet connection will be turned off at some point. Tumbleweed will blow down the corridor.

I’m going to try and schedule some stuff to the DR ahead of time, so you should still have something to mull over/delight in/vituperatively argue with (delete as appropriate).

The third – and most important – reason why this week’s circuses leave me cold is that I’m spending my time working on something far more interesting, and of much greater long run benefit to our readers.

Indeed, that’s the reason why I’ve been in and out of the DR in recent weeks.

Actually, on that note, I’d like to express my thanks to Glenn for pulling together a great range of content last week (you can catch up here if you missed any of it).

It freed me up to film some stuff as part of a project I’ve been working on for the last six months.

I’ll be telling you more about it over the next couple of weeks, but basically it involves me, a man from Yorkshire and a simple technique that could massively boost the income you make on a lump sum.

As you don’t need me to tell you, this has been a major challenge for a long, long time.

The fact that it’s now notable when some long-dated government bonds aren’t yielding less than zero is testament to that.

Now, the mood music has shifted in the last year or so. Yields – even on Swiss sovereign bonds – are going up.

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In the States, the Fed is (so far) sticking to its guns about three interest rate rises this year.

So is the low returns problem over?

In a word, no.

For one thing, savers have had something of a lost decade. The income they expected to earn once they’d built up their pot just hasn’t been on offer at anything like the levels of earlier years.

So there’s some catching up to do.

For another thing, consider why yields are rising. It’s not the whole story, but a big part of it is concerns about rising inflation.

Bonds are less attractive if the fixed income they pay is going down in real terms (and remember, bond prices and yields move in opposite directions).

Similarly, if at some point you’re able to make (whoop-de-doo) 3% on a savings account, that’s not that great if inflation rises to more than that.

You’re just running on a treadmill (and not quite running fast enough).

For a third thing, slightly-higher-but-still-historically-paltry US interest rates are of limited benefit to British savers.

“I have tremendous sympathy for savers,” Bank of England Governor Mark Carney said last August.

However, he then went on to say he and his colleagues “work for the economy as a whole”.

The BoE has its eyes squarely on Brexit.

Its policymakers are not among that number who say the pessimism is overblown and we can just leave and it’ll be great. Far from it.

So they’re in no hurry to raise the monthly payments of millions of variable rate mortgage holders.

Nor are they in a hurry to do anything that will support the pound. That may sound counterintuitive, until you recall that letting the pound depreciate is how they responded to the 2007-08 financial crisis.

And a weaker pound was also the response to the recession of the early 1990s… and the 1976 IMF crisis… and the 1967 balance of payments crisis…

It’s what we do. When we get in trouble, the exchange rate takes some of the strain.

So don’t hold your breath for a meaningful reprieve from the low returns problem.

Instead, stay tuned to what we’ll be sharing next week and the week after.





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