FINANCE Bloomberg Businessweek July 29, 2019So What’s the
Alternative?
24
○ Centralbankerssaygovernmentsneedto
playa biggerrolein providingfiscalstimulusTHEBOTTOMLINE Borrowers,savers,bankers,money
managers,andretireesweregettingusedtoideaofratesslowly
goingbacktonormal—andnowtheFedseemsreadytocutagain.interest rates are weighing on their outlooks for
revenue from lending.
Individuals have had to get used to earning pal-
try rates. The national average rate on savings
accounts is 0.1%, little changed from four years
ago and down from 0.3% in 2009, according to
data from Bankrate.com. In 2000, well before the
financial crisis, the rate was 1.73%. “We never got to
the would-be promised land with respect to higher
rates,” says Mark Hamrick, senior economic analyst
at Bankrate.com. “This has been the difference for
savers between having more money and not.”
The problem is the same for institutions that
manage savings on behalf of others. Pension funds,
overseeing trillions of dollars in retirees’ future
cash, have been ratcheting down return expecta-
tions. The 30-year Treasury bond, a favored debt
security, yields about 2.5%—compared with an aver-
age 6.5% since the 1970s. Even a record rise in stock
prices hasn’t solved the low-return problem for pen-
sion funds, because many of them cut their alloca-
tions to equities after the financial crisis. Ben Meng,
chief investment officer of the California Public
Employees’ Retirement System, said in June that
the expected return on his pension portfolio over
the next 10 years would be 6.1%, down from a pre-
vious target of 7%.
Where low rates really bite isn’t in current
returns but in the future gains investors can reason-
ably expect. Interest rates set a kind of baseline for
the return on all assets. As they fall, bond values rise
and stocks often do, too. But once rates have settled
at or near rock bottom, there’s less room for that
kind of price appreciation.
All this has sent investors looking under every
available rock for more return—even if it means tak-
ing more risk. The fear is this could lead to bubbles
and eventually destabilize the financial system.
“Institutional investors are out there in the great
truffle hunt for yield,” says Guggenheim’s Walsh.
“This is particularly true of large institutions, like
banks and insurance companies and pension funds.”
It’s a global phenomenon. Norinchukin Bank, a
cooperative that invests the deposits of millions of
Japanese farmers and fishermen, has $69 billion in
collateralized loan obligations—essentially loans to
companies with less-than-stellar credit—in the U.S.
and Europe.
While some Fed officials wish they could get back
to more normal rates, they seem to have their hands
tied. Although unemployment rates are very low, the
economy took an agonizingly long time to recover
from the financial crisis. Now a slowdown in global
growth and headwinds from Trump’s trade war have
made risks to U.S. output too strong to ignore.Negative interest rates from central banks come
with costs. They’re blamed for squeezing banks,
punishing savers, keeping dying companies on life
support, and fueling a potentially unsustainable
surge in asset prices. This isn’t lost on policymakers
at the European Central Bank, who pushed a keyThe surprising persistence of low rates has even
quietly reordered the hierarchy on Wall Street.
Hedge fund managers may still be glamorous on
shows such as Billions, but in real life they’ve had to
fight to retain clients. Many hedge funds thrive on
volatility, and in a world where the dreaded spike in
interest rates has never arrived, there’s been too lit-
tle of that for them. The long fall in rates has made it
easier so far to earn money with simple investments
such as stock and bond index funds. Meanwhile,
cheap financing costs and rising asset values have
been a boon for private equity firms.
In 2009 bond powerhouse Pacific Investment
Management Co. saw all this coming when it
dubbed its multiyear investment outlook “the new
normal” and predicted lower long-term yields. It
saw the same issues the Fed and central bankers
around the world are grappling with now: slow
growth, a combination of technological innovation
and low-cost global labor that eases inflationary
pressure, and a glut of savings as the populations
of rich countries age. Looking ahead, with many
of those 2009 factors remaining, “the new wrinkle
is concern around global trade and countries look-
ing more inward,” Pimco Group Chief Investment
Officer Dan Ivascyn says. “Yields can absolutely
go a lot lower.” —Liz Capo McCormick with John
Gittelsohn, Christopher Anstey, Ben Holland, and
Michelle F. Davis○ Powell