Real Interest Rates at a New Low

[dado potato]

On 8/4/2020 the 10-year real yield had dropped to -1.05%


On July 23 the US Treasury auctioned 10-Year Treasury Inflation Protected Securities (TIPS) with a face value of $14 billion. The real yield to maturity on that deal was -0.93% The TIPs were priced at that auction to under-perform official CPI-U inflation by almost 1% for 10 years,

These are signs of the times.

My 1992 edition of Your Money or Your Life, by Joe Dominguez and Vicki Robin, strongly advocated investing in Long-term US Treasury and Agency bonds.

In 1969, when Joe reached Financial Independence, his capital was invested in bonds with interest averaging 6.85% interest and maturities extending into the 1990s...

Today, there are investors willing to accept a negative real yield to maturity on US Treasury securities. I would assume their plan is not to hold the securities to maturity, but rather to sell them at a gain, assuming that negative interest rates will some day be greater than when they bought the TIPS.

Savers are in a peculiar and perplexing situation at this time. They might be able to obtain (at best) 0.8% on a savings account with FDIC/NCUA deposit insurance. Or they might go long Treasuries with a negative real yield to maturity. The "safe" alternatives are not terribly rewarding in terms of yield.

[Yppej]

With prices for supermarket basics rising faster than overall inflation do you think it makes more sense to buy canned goods, toilet paper and other things you will use in the future before they go up more? Would that get you a greater return on investment than money in the bank? Or is that not a good personal investment strategy?

[Rogar]

I questioned my Fidelity advisor about why the stock market seemed to be doing as well it is considering the state of things. He said one reason was interest rates were so low there were few other opportunities for investment. There really are not a lot of good choices to stay a little above inflation and keep risk relatively low. He suggested, as if it were unofficial, gold. I said gold mining stocks and he said no, gold. I checked silver prices because I still have some of grandmother's sterling set and look to me like it's about doubled from historically recent prices and a five year high. I don't plan on making any big changes but it's another sign of the times. By some, a safe haven when things are unsettled.

[bae]

With prices for supermarket basics rising faster than overall inflation do you think it makes more sense to buy canned goods, toilet paper and other things you will use in the future before they go up more?

I have plenty of storage room here. And a system for keeping track of Useful Items.

And in these troubled times, going to the store to buy things can be problematic.

So I have stocked up on Useful Items sufficient for Some Period Of Time, to save money, to reduce the logistics pain and disease exposure of shopping, and to provide a buffer of supplies in case my remote community suffers supplyline interruptions in the coming Period Of Time.

[Rogar]

With prices for supermarket basics rising faster than overall inflation do you think it makes more sense to buy canned goods, toilet paper and other things you will use in the future before they go up more? Would that get you a greater return on investment than money in the bank? Or is that not a good personal investment strategy?

I think the common investment or savings amounts people are making would rank in the thousands of dollars. As an investment commodity in foods and paper staples a person might need a whole lot of storage space. It might be a valuable bartering commodity if there some sort of global collapse but is otherwise mostly not liquid in any sort of secondary market. It doesn't make sense to me.

[sweetana3]

It is only a "safety" issue not an personal investment issue. I am with Rogar. And as BAE has posted, if in a remote or rural location, supplies are necessary.

[SteveinMN]

I have stocked up on Useful Items sufficient for Some Period Of Time, to save money, to reduce the logistics pain and disease exposure of shopping

We are doing the same, though we do not live on a remote island subject to supply interruptions.

I don't believe it's actually saving us money because the items we're buying are still popular enough to not go on sale these days. When the first panic arrived here, there were some price jolts but mostly out-of-stocks. When items were on the shelf, they were at more-or-less ordinary prices. So i suppose stocking up now would save us some money later. I simply anticipate that the illness rate will get significantly higher; if i can prepare for that before other peoples' panic sets in, life will run more smoothly and we'll get the toilet paper we prefer and not merely the TP we can buy.

[LDAHL]

We have always tried to stay reasonably well stocked, but not at zombie apocalypse prepper levels. We bulk buy where it can save a few bucks, but we’re not fanatics about it. They grow and process a lot of food around here, so we’re not particularly worried about lengthy supply disruptions.

Long term, I think all the government (not just ours) efforts to spend more while working to depress interest rates and maintain asset prices will have some negative consequences.

[dado potato]

Real interest rates, as reported by the US Treasury appear to have reached an all-time low on August 6, 2020.
Term Real Interest Rate
5 yr -1.32%
10 yr -1.22%
20 yr -1.08%

In the days since 8/6/20 real interest rates have increased by a few basis points, but the rates are still negative on the US Treasury debt.

A saver who is willing to shop all the banks for the highest-yielding savings account may settle for an Annual Percentage Yield in the .8% to 1.05% range. In real terms the rates on savings accounts are all negative, with CPI up 1.6% year-over-year in July (1.0% all-included, 1.6% with food and energy prices excluded).

Despite the negative real yield, I think it's a good idea to maintain a comfortable cash reserve, for the option value of cash (being able to absorb financial shocks, or to buy assets when other people are in a panic to sell).

[jp1]

I can certainly testify that interests rates are low. As I mentioned in housing, our offer on a home was just accepted. The quoted interest rate for our 30 year mortgage is 2.99%.