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How Long for Low Rates?

CAMBRIDGE – How long can today’s record-low, major-currency interest rates persist? Ten-year interest rates in the United States, the United Kingdom, and Germany have all been hovering around the once unthinkable 1.5% mark. In Japan, the ten-year rate has drifted to below 0.8%. Global investors are apparently willing to accept these extraordinarily low rates, even though they do not appear to compensate for expected inflation. Indeed, the rate on inflation-adjusted US Treasury bills (so-called “TIPS”) is now negative up to 15 years.

Is this extraordinary situation stable? In the very near term, certainly; indeed, interest rates could still fall further. Over the longer term, however, this situation is definitely not stable.

Three major factors underlie today’s low yields. First and foremost, there is the “global savings glut,” an idea popularized by current Federal Reserve Chairman Ben Bernanke in a 2005 speech. For various reasons, savers have become ascendant across many regions. In Germany and Japan, aging populations need to save for retirement. In China, the government holds safe bonds as a hedge against a future banking crisis and, of course, as a byproduct of efforts to stabilize the exchange rate.

Similar motives dictate reserve accumulation in other emerging markets. Finally, oil exporters such as Saudi Arabia and the United Arab Emirates seek to set aside wealth during the boom years.