U.S. long-term interest rates have plunged to unprecedentedly low levels — lower even than was seen at the depths of the global financial crisis.
Why it matters: The economic world has never looked like this — not in the U.S., anyway. Rates this low don't make rational sense, and they speak to severe economic pessimism and dislocation.
- The bottom line: This is the market's way of begging Treasury secretary Steven Mnuchin to invest in projects that will improve America's economic health over the long term.
Driving the news: For a homebuyer looking at 30-year fixed mortgage rates of 2.75%, the current state of affairs can seem unambiguously positive. But these rates violate common sense intuitions of what money is worth.
- Consider a $1,000 tax refund that you're expecting from the government this month. Would you perhaps prefer $1,5o0, payable to you (or your heirs) in the year 2050?
- Very few individuals would accept that offer. After all, $1,500 today buys only as much as $740 would have bought 30 years ago.
- The market, however, prefers the distant promise to cash today. A U.S. government obligation to pay $1,500 in 2050 is worth more than $1,000 today.
- In fact it’s worth $1,011, according to the Treasury "strips" market, which trades government promises to pay a certain amount on a certain date.
How it works: Economic fears driven by the novel coronavirus have only served to increase the amount that investors are willing to pay for the safety of U.S. government obligations.
- Flashback: Before the financial crisis hit, government promises to pay in the distant future were worth very little — only about 25 cents on the dollar, for payments 30 years hence.
- Since the crisis, expectations for future growth and inflation have remained sluggish. The less vibrant an economy, the harder it becomes to invest money for a large future payoff, and the more that investors retreat to safety at any price.
The big picture: The U.S. government can borrow money today while promising to repay much less, in real terms, than it will be worth in the future. The best time for any government to invest in the future is when money is free, like it is now.