◼ FINANCE Bloomberg Businessweek July 29, 201923ILLUSTRATION
BY
DAPHNÉ
GEISLER
Low Rates Changed
Everything
● A decade of cheap money has unmoored the
financial world from all the old assumptionsPartners, says there’s been “a paradigm shift of epic
proportion for investors.” Not only are short-term
rates low, but long-dated bond rates are minuscule,
too, suggesting that investors see little likelihood of
rates—and the economic conditions they reflect—
changing anytime soon.
Borrowers of all kinds have been clear bene-
factors of this sea change, with many nations and
companies locking in low rates for as long as a
century. Belgium and Ireland have sold 100-year
bonds, as did Austria this year at a yield of 1.171%.
In 2015, Microsoft Corp. sold 40-year bonds and
the University of California issued 100-year debt.
Subdued rates have also buffered the U.S. Treasury
from rising interest costs on the federal debt.
For banks, the squeeze in long-term rates isn’t
ideal. That’s because they tend to fund long-term
investments with short-term debt, so they prosper
whenlong-runratesaresignificantlyhigherthan
shortones.IntheU.S.,bankshavestillbeenable
toprofit,withthetopfiverecentlycracking$30bil-
lion in quarterly earnings for the first time. But some
big commercial banks have warned that lowerIt’s hard to wrap your head around just how low U.S.
interest and bond yields are—still are—a decade after
the Great Recession ended. Year after year, prognos-
ticators said that rates were bound to go up soon:
Just be ready. That exercise has proved to be like
waiting for Godot.
In 2018, Jamie Dimon, chief executive officer of
JPMorgan Chase & Co., put Americans on alert to
the likelihood of higher interest rates. He said the
global benchmark for longer-term rates, the yield on
a 10-year Treasury bond, could go above 5%. Right
now it’s just a hair above 2%. Thirty-year mortgage
rates are a fraction of long-run averages, and com-
panies too are paying very little to borrow. All that
cheap money has been helping the economy along.
On the other side of the ledger, bank depositors are
getting paid only a fraction of 1% on their savings.
The longevity of low rates has upended
long-standing assumptions about money and
reshaped a generation of investors, traders, savers,
and policymakers. The Federal Reserve has tried
to push the U.S. into a higher-rate regime, raising
rates nine times since 2015, when the key short-
term rate was near zero. But now the central bank
appears ready to reverse course and start cutting
again when it meets at the end of July. “This is the
newabnormal,”saysDavidKelly,chiefglobalstrate-
gistatJPMorganAssetManagement,whichoversees
$1.8trillion. “Normally when you are in this phase
of an expansion, you have a rising inflation prob-
lem, a Federal Reserve overtightening to slow the
economy,andbusinessesthatcan’taffordtobor-
row.Noneofthatis truerightnow.”
Investorsarebettingthata quarter-percentage-
point rate cut is all but certain, according to prices
inthefuturesmarket.FedChairJeromePowellrein-
forcedthoseviewswithremarkstoCongresson
July10 and 11. He cited rising global risks, low infla-
tion, and weakening business investment and manu-
facturing. Depressed U.S. rates come as other central
banks, including the European Central Bank, have
turned more dovish—even with their rates already
set below zero.
Anne Walsh, chief investment officer of fixed
income at money management firm Guggenheim