Nowhere is the reversal of traditional consumer time preferences more evident than among hard-working, high-earning individuals who are near retirement and inclined to use financial advisors. But it is also starting to surface among younger millennials captivated by the FIRE (“Financial Independence, Retire Early”) movement.
In nations where interest rates are negative for the entire 50-year yield curve, central bank policy has been accompanied by slow growth and aging demographics. Now that those countries are confronted with savings gluts, it’s no surprise their interest rates are anemic, though some have tried to spare small savers. Not only do Germany, Japan and Switzerland have older populations; they also have generous pension systems and very high savings rates. Fewer Europeans participate in the equity markets, but those who do can find higher dividends closer to home than Americans.
Some observers believe Europe’s situation is special. The level of interest rates there “is mind-boggling,” notes Loomis Sayles vice chairman Dan Fuss. “It has taken on a life of its own. The central bank is trying to hold the political union together and help the economy. Relative to the rest of the world, U.S. interest rates are high.”
Who would want to buy 10-year U.S Treasurys yielding a paltry 1.7%? European and Japanese investors, to name a few.
“U.S. Bonds are at their most attractive yields” compared with Europe’s in decades, says Robert Tipp, manager of PGIM’s Total Return Bond Fund. “That’s what people have difficulty getting their arms around.”
It’s also why U.S. government bonds staged such a powerful rally in August. “People who think Treasury yields are going to 3% or 5% are not looking at what’s going on in the world,” Tipp continues.
With America’s higher growth and younger demographics than other developed nations, its situation is slightly different. What’s not clear is how much those advantages will help if the global economy continues to slow. “The Fed has made it clear if we get hit by a sizable shock and [get] close to a recession, they’ll need to take interest rates down to near zero,” says Nathan Sheets, chief economist at PGIM Fixed Income and former Undersecretary of the Treasury for International Affairs in the Obama administration.
The sheer amount of global sovereign debt also acts as an economic depressant. It weighs on animal spirits, Sheets says, makes people worry and drives them into safe assets. When prices for risk-off assets like government bonds soar, institutions like pension funds with pre-established bogeys may feel compelled to move out on the risk curve as prudently as possible.
At the same time, Sheets notes that a number of structural factors holding down rates at both the long and short ends of the yield curve look strong and persistent. In the wake of the financial crisis, bank regulations around the world force them to hold safer assets.
The Fed is targeting 2% inflation. Yet in another sign of the economy’s softness, the central bank’s favorite price indicator, the personal consumption expenditure index (or PCE), has managed to hit that number only 10% of the time in the last decade. Still, inflation remains relatively stable in the U.S. while the rest of the developed world frets about deflation.