Ripple Effects

Mike Zaccardi

I STILL CONSIDER myself one of the younger folks at the energy trading firm where I work. The more tenured employees will sometimes talk about the early 1980s, when mortgage rates were north of 10%. “Try paying that down quickly,” they’ll quip, as we watch the 10-year Treasury note yield scroll by on the ticker—at around 0.7%.

I never thought interest rates would stay this low, especially given the recovery since March by both the stock market and many economic indicators. Just recently, the ISM manufacturing and services indexes were at 16-month and 17-month highs, respectively, though many pundits say the U.S. economy won’t fully recover from the COVID-19 crash until perhaps late 2021.

Still, for now, Treasurys are basically at all-time lows, no matter which part of the yield curve you look at—and that has five major implications:

1. A negative real risk-free rate. The yield on Treasury bonds, especially the 10-year note, is often considered the risk-free rate, meaning it’s the return you can earn while taking minimal risk.

But that risk-free rate isn’t looking terribly tempting. Annual inflation is running at just 1%. Inflation expectations for the next five years are under 2%. Nonetheless, those inflation rates are above both short- and intermediate-term Treasury yields. That means the after-inflation “real” interest rate on Treasurys is below 0%.

To earn inflation-beating gains, savers are relegated to taking more risk in higher-yielding corporate bonds or even the stock market. And, no, the bank isn’t an alternative: During much of the 1980s and 1990s, savings accounts earned 1% to 4% after inflation. Today, the real yield at many banks is often more like negative 1%.

2. Stock valuations are higher. Stock market bears love posting charts of the S&P 500’s price-earnings (P/E) multiple. Right now, it’s sky high, no doubt about it. But a key factor in determining stock valuations is current interest rates, especially Treasury yields. The lower those yields, the higher stock valuations tend to climb.

Recall the early 1980s again, when the 10-year Treasury yield was 15% and the stock market traded below eight times earnings. Jump ahead to today, and the S&P 500 trades at 35 times the past year’s reported earnings—a level that reflects not only record low interest rates, but also depressed corporate profits. Good luck to those waiting for a return of single-digit P/E ratios on the S&P 500. Unless interest rates rise sharply, it’s very unlikely to happen.

3. Government debt isn’t a big risk—for now. U.S. government debt has soared to nearly $27 trillion. But take heart, it’s nothing to lose sleep over. You should be concerned about your health, how your kids are doing in school and paying the bills, not your share of government debt. Thanks to rock-bottom Treasury yields, the interest our nation pays remains manageable.

4. Mortgage rates are dirt cheap. I’m not looking to buy a house anytime soon. But for those in the market, what a time it is to be alive. Thanks to low Treasury yields, which are used to benchmark mortgage rates, borrowing costs are tiny.

Freddie Mac reports the average 30-year fixed rate mortgage is around 3% and the typical 15-year loan is close to 2.5%. If inflation ever ticks back up to its 50-year average of 3.9%, you’d be paying a lower mortgage rate than inflation. Already own a home? Consider refinancing if your mortgage rate is north of 4% and you still have a big outstanding loan balance.

5. A weaker U.S. dollar. Market watcher that I am, it’s hard not to notice the drop in the dollar over the past few months. Gold stocks and raw commodities surged earlier this summer. Emerging market stocks were even beating U.S. shares for a time. Falling interest rates mean foreign investors are less inclined to put money to work in Treasurys, so demand for the greenback has waned.

Borrowers, savers, retirees, young investors and international travelers (if that’s even a thing anymore) are all affected by these unprecedented low interest rates. Maybe one day I’ll be that tenured guy at the office, telling the youngsters about the good old days of a 2.5% mortgage.

Mike Zaccardi is a portfolio manager at an energy trading firm and a finance instructor at the University of North Florida. He also works as a consultant to financial advisors on an hourly basis, helping with portfolio analysis and financial planning. Mike is a Chartered Financial Analyst and Chartered Market Technician, and has passed the coursework for the Certified Financial Planner program. His previous articles include Raw Deal, Cooking Up a Story and Please Ignore This. Follow Mike on Twitter @MikeZaccardi, connect with him via LinkedIn and email him at

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2 years ago

Ah…but you are only telling half the story! When mortgage rates were at 10%, simple savings were paying 7%-8% and some CDs were in the 13%-15% range. Retirees could actually live off the interest they would get!

Jonathan Clements
Jonathan Clements
2 years ago
Reply to  IAD

Not quite…. If I have a savings account paying 10% when inflation is 10% and I then spend my 10% yield, I’ve essentially reduced the after-inflation value of my savings by 9% (and it would be even worse after figuring in taxes). For all investors, including retirees looking for income, what counts are yields relative to inflation. For the investors who bought 30-year Treasury bonds in the early 1980s and held on, the next three decades were great (though they would have done better in stocks). For those who had their money in savings accounts and CDs, where yields are tied to short-term interest rates, they were probably no better off then than they would be today — and they may even be in better shape today, because they’re paying taxes on 1% yields, rather than on yields of around 10%.

Peter Blanchette
Peter Blanchette
2 years ago

It is truly amazing how we Americans do not learn from other countries. We think that we have all the answers. Did the fact that the Japanese have had practically zero interest rates for 20 years do much for that economy? Our Fed cut rates in 2019 3 times while the unemployment rate was at historic lows. The Fed’s third mandate apparently is to support the stock market. It is all about the stock market when the Federal govt cuts corporate taxes even though there is no empirical evidence that investment is increased unless the corporate community has confidence in the projects available to them to invest in. We have tremendous increases in the debt due to the tax cuts and so the Fed cuts rates so that the interest cost to pay back that debt is decreased. Unless the inequality issue is addressed there will not be the growth anywhere around the 3 or 4 % range needed to pay back the debt in a reasonable length of time. It is the millions of lower and middle income folks who drive the economy. The top 1% can only buy so many cars and houses and clothes. Even though the population is aging in both countries, neither Japan nor the US is inclined to increase immigration because of cultural reasons for the former and the latter for xenophobic reasons as we have since our nation’s birth. If I made my money via equity and debt markets I would be grateful for all of the assistance from the Fed and the Fed govt.

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