View Full Version : Real Interest Rates at a New Low
dado potato
8-5-20, 7:24pm
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.
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 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.
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.
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.
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.
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.
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
8-18-20, 10:56am
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).
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%.
rosarugosa
8-19-20, 6:27am
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%.
For comparison, when we bought our house in 1985 the interest rate was 13.125%.
For comparison, when we bought our house in 1985 the interest rate was 13.125%.
I just put both interest rates in a mortgage calculator. At 13.125% our monthly payment would be 2.6x what it is at 2.9%.
For comparison, when we bought our house in 1985 the interest rate was 13.125%.
You've got me beat! When we bought our first house in 1979 our rate for a VA loan was 10.5%. I thought that was brutal.
Some of the forces that created the monetary misery of the seventies and early eighties seem to be re-emerging.
We had a 14% interest rate when we bought our first house.
But we could get 5% interest on cash in the bank, and treasuries at 11%. Wish I had known more about money then.
catherine
8-19-20, 10:20am
For comparison, when we bought our house in 1985 the interest rate was 13.125%.
We bought our first house in 1980 and the interest rate was over 13% also! Those were tough times for homebuyers! My GI house is 3.25%, 10 pos less.
iris lilies
8-19-20, 12:02pm
Kids these days! They got no concept of 14% mortgage rates.. They be ignorant of hard times! Ha ha, but true
frugal-one
8-19-20, 3:11pm
You've got me beat! When we bought our first house in 1979 our rate for a VA loan was 10.5%. I thought that was brutal.
Same here. Talked to MIL and wrote out a contract paying her more interest than she could get at the bank and less than we would have to pay. She was ticked when interest rates went down and we paid it off. She thought we should continue paying her more?????
iris lilies
8-19-20, 3:42pm
I got a first time buyer cut interest rate through some city program. It was at least 11%, I think it 11 1/2.%
I remember looking at a piece of real estate that had an assumable loan for 16%.
Kids these days! They got no concept of 14% mortgage rates.. They be ignorant of hard times! Ha ha, but true
Makes you wonder what will happen when the bubble bursts, and the realization dawns that a price must be paid for that ocean of artificial liquidity. Obviously, we won’t want to accept our own role In what is ultimately a disconnect between consumption and productivity, and will need to identify scapegoats. I wonder who we will choose? The financial industry? A shadowy oligarchy and their meretricious minions? Some wicked top percentage? Free lunch governance? White privilege? The Fed? The Gnomes of Zurich?
iris lilies
8-21-20, 11:45am
Makes you wonder what will happen when the bubble bursts, and the realization dawns that a price must be paid for that ocean of artificial liquidity. Obviously, we won’t want to accept our own role In what is ultimately a disconnect between consumption and productivity, and will need to identify scapegoats. I wonder who we will choose? The financial industry? A shadowy oligarchy and their meretricious minions? Some wicked top percentage? Free lunch governance? White privilege? The Fed? The Gnomes of Zurich?
You know very well a major if not main source of the stupidity is US Congress and their willingness to spend us into oblivion.
The only sane voice in that illustrious body is Rand Paul, occasionally speaking up for fiscal sense. I still remember his wonderful Halloween costume mini years ago he went dressed as the national debt which he said was the scariest thing he could think of. I love Rand.
I sent him campaign money. He’s the only Pol I’m sending money to.
You know very well a major if not main source of the stupidity is US Congress and their willingness to spend us into oblivion.
I'd want to include a president who is building a medieval wall and wants to increase military spending while at the same time cutting sources of revenue.
You know very well a major if not main source of the stupidity is US Congress and their willingness to spend us into oblivion.
The only sane voice in that illustrious body is Rand Paul, occasionally speaking up for fiscal sense. I still remember his wonderful Halloween costume mini years ago he went dressed as the national debt which he said was the scariest thing he could think of. I love Rand.
I sent him campaign money. He’s the only Pol I’m sending money to.
I’m inclined toward government fiscal folly myself, but I wonder if factuality will have much weight when things head south and villains get identified. There are an awful lot of people with an interest in outsourcing the blame to some scapegoat they can punish, and flinty adult realism will almost always be the minority position as long as it’s possible to buy votes on credit.
frugal-one
8-21-20, 2:50pm
I'd want to include a president who is building a medieval wall and wants to increase military spending while at the same time cutting sources of revenue.
And, who campaigned with the promise of balancing the budget???? Of course, he is going to blame someone else!
https://www.nbcnews.com/politics/white-house/trump-broke-his-promise-fix-debt-he-ll-blame-congress-n981866
The same Rand Paul that voted for a trillion dollar budget busting tax cut for rich people two years ago? LOL.
I’m inclined toward government fiscal folly myself, but I wonder if factuality will have much weight when things head south and villains get identified. There are an awful lot of people with an interest in outsourcing the blame to some scapegoat they can punish, and flinty adult realism will almost always be the minority position as long as it’s possible to buy votes on credit.
True. The republicans have managed to buy a lock on rich people’s votes. Not a very efficient buy though. For a trillion bucks to poor people they could’ve gotten a lot more bang for our bucks.
True. The republicans have managed to buy a lock on rich people’s votes. Not a very efficient buy though. For a trillion bucks to poor people they could’ve gotten a lot more bang for our bucks.
Somehow, I don’t think the usual spiral of reciprocal finger-pointing will have much impact on the problem. Insisting we can solve it by gouging the rich won’t work. There aren’t enough of them to cover the current tab, much less all the great “new” ideas being offered up. We will either need to tax the big-percentage people or spend less. But of course few want to say that out loud.
You’re right about the reciprocal finger pointing. But it’s also time that republicans face the fact that the idea that their party is somehow more fiscally responsible has been a fiction since sometime in the third week of January 1981.
You’re right about the reciprocal finger pointing. But it’s also time that republicans face the fact that the idea that their party is somehow more fiscally responsible has been a fiction since sometime in the third week of January 1981.And you still don't like them?
That is so far out of my league financially that I can't give you any words of wisdom, just do what makes sense to you and your financial planner.
You still have to sell the house at the end of the day, so then you have to pay the mortgage back, so I guess I am not following what you are accomplishing?
That makes a lot of sense. I guess only potential downside I can see is if we hit another real estate bubble.
Why would you rent out current home instead of selling? Do you want to come back, and keep your current house? Renting your house from across the country can be very stressful.
We are nervously considering doing a refinance cash-out on our house so that we can have cash on hand when we look for a new place in the next 1-2 years. The best option we've got is 2.625% with zero points and $1602 in closing costs on a 30-yr fixed mortgage in the amount of $510k. It feels like everything is in place and the smart thing to do. Great rate, everything easy to accomplish (dh's steady long-term employment, high value collateral, etc.) but dh and I are both nervous. We've just never done anything like this before. We've always been in the pay it off early camp. The idea of all that cash, with the corresponding interest, is unnerving.
Any words of wisdom?
What is your current interest rate. It's undoubtedly higher, so that will be a plus. Also, though, how is this going to affect the monthly payment? Yes, you can park the money somewhere to cover the interest, but you should also account for the additional monthly cost if there is any.
Our house is paid off. Refi cash-out is the term even though there is no existing mortgage. In the past we've had rates of 11.5, 7.75, and the last one was 5.75 on a 15-yr. loan. I can't believe how crazy low they are now.
Short-term it will be weird to make payments while the money sits, but we were putting that money into savings anyway, so it's just a matter of re-routing the funds.
It's tempting to consider the 15-yr. loans at 2.37%, but the monthly payments would jump uncomfortably high.
So you will have two houses to care for and maintain and repair. That's one issue. Will you lose your homestead exemption on the taxes if you convert it to a rental? Are you allowed to rent it out under terms of new mortgage?
Teacher Terry
9-2-20, 8:29pm
If living in Atlanta is temporary I would rent there instead of buying.
I have been dealing with a mortgage loan officer this week and for our situation - paid for house but trying to buy in another state she suggested a regular mortgage on the second house which is then "recast" into regular 30yr which can be paid off ASAP without penalty. We don't intend to keep present house though. One house is enough trouble.
Hypothetically, if you take $500,000 in cash equity now through financing at 2.5% and get 1% or less interest on that revenue, all I can see if that you are losing money, a lot of money. Can you obtain any savings rate on the total that will not tie it up and still yield more than the interest on the mortgage?
How long would you be in Atlanta? Compare the pros and opportunity costs as well of renting a place there and simply retaining you current home. Why do I think that you wanted to move away from your current home in a couple of years? You have too many variables to play with, it seems to me.
San Onofre Guy
9-5-20, 5:27pm
Our house is paid off. Refi cash-out is the term even though there is no existing mortgage. In the past we've had rates of 11.5, 7.75, and the last one was 5.75 on a 15-yr. loan. I can't believe how crazy low they are now.
Short-term it will be weird to make payments while the money sits, but we were putting that money into savings anyway, so it's just a matter of re-routing the funds.
It's tempting to consider the 15-yr. loans at 2.37%, but the monthly payments would jump uncomfortably high.
you are debt free now, remain so. Don’t take on the risk of a foreclosure. Once out of debt, stay out of debt
I agree. Renting for a few years in the new location is a better plan.
I agree with others. If the concern is that you want to keep your current house while testing out living in Atlanta then I would rent for a year in Atlanta. Renting out your current home would provide income to pay the rent in Atlanta. After a year you could then either sell your house and buy something in Atlanta or move back if it turns out that you didn’t like Atlanta. A side benefit would be that you could figure out what neighborhood of Atlanta you wanted to live in while you are renting.
Teacher Terry
9-6-20, 2:24pm
Renting is usually a big problem with 3 dogs. I forgot about them:))
Interest rates really ARE insanely low now. We had been quoted 2.99% a month ago, which we thought was fantastic. Yesterday we signed all the closing docs and our final rate is 2.26%! That cuts our monthly payment by almost 10%!
Interest rates really ARE insanely low now. We had been quoted 2.99% a month ago, which we thought was fantastic. Yesterday we signed all the closing docs and our final rate is 2.26%! That cuts our monthly payment by almost 10%!
:cool: :0! And I think about interest rates being 19% when we bought our first home:( 60k $943. 2.26%? buys $247,500.
:cool: :0! And I think about interest rates being 19% when we bought our first home:( 60k $943. 2.26%? buys $247,500.
I can't imagine that we will ever refinance. Even at 2.99 our total interest for 30 years was only going to be 45% of the loan cost if we just paid the monthly minimum. At 2.226% it will be significantly less than that. And we intend to pay down the principal to zero over the course of the next ten years. The loan cost is almost laughably small.
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