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More thoughts on my hypothesis that U.S. interest rates could still go lower ...
Interest rates in Germany are -0.94% as I write.
Read that closely – that's a NEGATIVE number – roughly negative 1%.
Said another way, you will "earn" -0.94% interest per year over two years in Germany today.
I put "earn" in quotes because you will actually lose that money each year. It's negative interest. By buying two-year government bonds in Germany, you are guaranteeing that you will lose roughly 1% a year in "interest."
What's going on?
Lots of things… But it primarily comes down to the basics: supply and demand.
There is no supply, and there is lots of demand…
On the demand side, the French are buying German bonds to get money away from the uncertainty around France's presidential election. And the European Central Bank must buy 80 billion euros' worth of German bonds by year-end. There's plenty of demand.
Meanwhile, the Germans aren't increasing supply to meet this demand… So we have this extreme negative yield.
It's not just Germany, though…
In Japan, the two-year government bond "pays" -0.28% interest. Again, "pays" is in quotes because it's a negative interest rate – you are guaranteed to lose money by putting your money away for two years in Japan.
In the U.S., the story is different… You still earn a positive return on your money (1.16%) if you put it away for two years.
Here's what you need to know: Outside of the U.S., Japan and Germany are the world's largest developed economies.
As an investor, you have to make a choice… Here are your basic choices:
Your goal is to deliver income… and to keep your job. All things being equal, which of these three investments would you choose?
Given these (basic) choices, you would choose to invest in the U.S.
Here's the thing, though: A lot of money managers will make this choice this year.
Money managers choosing to put money into interest-earning U.S. investments creates demand. Demand for interest-earning products in the U.S. will push U.S. interest rates down.
I'm not talking about ultra-short-term interest rates, like the interest rates that the Federal Reserve sets. I'm talking about interest rates that are set by market forces… which usually means interest rates for two years or longer (like your mortgage).
Yes, my friend, interest rates in the U.S. are very low… You will earn just 1.16% per year if you put your money away for two years.
But when you look at the world's other two developed markets, it's clear that U.S. interest rates have plenty of room to fall, as investors flee those countries and seek the higher rates that the U.S. offers.
Long-term interest rates here in the U.S. are low… But in my opinion, they could surprise everyone and go even lower.
And that means home owners and home buyers may soon have the opportunity to lock in a 30-year fixed rate mortgage below 3%!!!
We are definitely living in bizarre and incredible times!
Give me a call if I can help you in any way.
On Your Team,
Ken
951-760-3833
KenAHall@gmail.com
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