Marc Cuniberti Rates on short term U.S. investments like CDs, savings accounts, T-Bills, Treasury notes and other instruments insured by the good faith and credit of U.S.
government are the highest they have been in a long time. When I was a boy, and much of the time while I was growing up, interest rates hovered around six percent. Those pushing into retirement age might remember when bank rates were that high, but you newbies out there will likely scratch your head and say, “Really?”
Yes, really.
Since debt levels of all types have reached astronomical levels in recent decades, and a number of financial calamities have also occurred during that same time frame, interest rates have stayed around zero to one percent. It is only recently, to address inflation, the Federal Reserve (Feds) have increased rates to above five percent.
Although these higher rates wreak havoc on those that depend on various forms of credit to negotiate their expenses, investors looking for yield are happily flocking to bank products like savings accounts, CDs and the less familiar T-bills and T-notes.
With rates on three-month, six-month and one-year products currently sitting north of 5%, there is something investors should consider before going all in on these financial commitments.
Historically, at least in the last 25 years or so, when the Feds increased rates that approached six percent, they have had to quickly lower them again to address economic hissy fits that subsequently occurred. Arguably, such calamities were brought about by such high rates.
There are differing opinions about why such economic pullbacks occurred shortly after rates were jacked higher, but the charts don’t lie.
Historically, there has been an overall downward direction in interest rates since about 1980, and every spike in rates was followed quickly by a reversal from the Fed. Each subsequent spike in rates was lower than the previous one and each reduction in rates was also lower.
These lower highs followed by lower lows price action in rates gives us an indication that as the overall economic debt levels reach higher and higher amounts, interest rates have had to decline to lower and lower levels to service that debt.
It makes total sense that as U.S. businesses and consumers amass more debt, interest rates have to be lower and lower to be able to cover the interest rate payments.
What is disturbing, at least to this analyst, is that only one time in the last 50 years have rates been raised to near where they are today. That was in July of 2008, when oil spiked to $145 a barrel, followed by spikes in many other commodities as well. The Feds raised rates to 6% or so to address such price increases (inflation) and the bank and real estate implosion followed soon thereafter.
One could argue the Feds and their rate increases were one of the major causes of the 2008/09 calamity, and once it occurred, rates were dropped quickly once again.
Fast forward to today and inflation is once again raging. The Feds are also once again approaching the same level of rates that they reached in July 2008.
Will the Feds break something in the banking sector again if they indeed were part and party to the 2008 banking implosion by jacking rates so high again?
To this analyst, the familiarities in this set up are all very familiar and all too frightening.
That said, if history repeats, or even rhymes just a little bit, some sort of economic implosion may soon be upon us, and if that occurs, the Feds will have little choice but to drop rates again.
That means those nice juicy rates you see at your local bank may come down once again, and investors will be stuck with near zero returns on their bank accounts, CDs and similar products that plagued us for years.
Foreseeing this possibility that rates may come down to near zero levels once again, investors might consider the various investments that freeze today’s rates well into the future and protect against an interest rate obliteration should it occur.
Products that do this are out there. Seek out a financial professional to see your options. And consider acting quickly. Once the Feds start to lower rates, the rates on those programs historically drop right along with them.
In other words, get while the getting’ is good.
“Watching the markets so you don’t have to”
This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, and California Insurance License #0L34249 His insurance agency is BAP INC. insurance services. Email: [email protected]
