Interest rates hit record lows
Europe’s woes mean savings for borrowers
The latest global financial jitters are producing big savings for the U.S. government, homeowners and other long-term borrowers, but tough times for savers.
The yield on the closely watched 10-year Treasury note — which helps set mortgage rates — swooned to a record low of 1.62% Wednesday. Five years ago, it was 5.03%.
Low rates are a huge savings for U.S. taxpayers because they’ll save billions of dollars on the cost of repaying some of the federal debt.
Mortgage borrowers will get some benefit from Europe’s woes, too: A 30-year, fixed-rate mortgage was at an all-time low of 3.78% last week, according to mortgage giant Freddie Mac.
If Treasury rates remain at current levels, mortgage rates could fall a bit further, says Keith Gumbinger, vice president of HSH.com.
Will rates fall on other consumer loans, such as credit cards, home equity loans and personal loans? “Not a chance,” he says.
And, because bond prices rise when interest rates fall, bond investors have fared well. The average U.S. government bond fund gained 7.6% the past 12 months, according to Lipper.
Though some will benefit from lower rates, savers will suffer with tiny yields on bank CDs.
Low rates have an ominous edge to them. Bond traders accept lower yields when they think the prospects of economic growth are slim.
“The bond market is a powerful leading indicator — in many ways the best economic forecast the market comes up with,” says Joe Davis, chief economist at Vanguard.
Today’s yields are below their levels in the depth of the 2008 credit crunch. In part, that reflects slowing exports to Europe, as many eurozone countries are in or near recession.
Bond yields also fell because of disappointing home sales figures from the government Wednesday, says Elaine Stokes, co-portfolio manager of Loomis Sayles Bond fund.
Finally, traders have been snapping up Treasuries because they’re safe, and given the European crisis, safety is the watchword. The “stream of news out of Europe gets their minds back to the dire situation they’re in,” says Gregory Whiteley, portfolio manager at DoubleLine.
And even at 1.62%, Treasuries look better than German 10-year bonds, which yield 1.27%, says Bloomberg. “Germany is the safe haven in euros, and the U.S. is the safe haven for people who don’t want to be in euros,” Whiteley says.
European investors are looking for a haven because Spain will need about $23.6 billion to bail out Bankia, one of its leading mortgage lenders. Without help from the European Central Bank, Spain will have to raise that money in the bond market. Spanish bond yields are at 6.64%.
LJUBLJANA, Slovenia — European voters furious that they are not being consulted about how to solve a debt crisis are threatening to derail the plans of political elites at the ballot box in coming weeks.
The Irish vote today on a deal negotiated by European Union financial ministers in Brussels that will force nations that use the euro as currency to adhere to strict spending and borrowing limits or be penalized.
The fiscal compact, which surrenders sovereignty on budget matters to the European Union, is being demanded by richer nations who are funding bailouts of debtor nations. But whether increasingly angry voters will go along as Europe heads for a summer of elections is a big question.
“It’s outrageous,” Oscar Rivas, 39, a sound engineer in Madrid, said in reference to demands that debtor nations rein in public spending and benefits. “Europe looks down on its citizens. When the European Union started, it was a good idea. (But now) they’re out of touch with the citizens.”
French voters go to the polls in June in parliamentary elections, and media polls indicate they will vote heavily against candidates who supported the spending cuts known as austerity measures. The measures were demanded earlier this year by the International Monetary Fund, the European Central Bank and conservative governments during closed-door meetings in Brussels, the administrative capital of the European Union.
The German parliament must vote on the fiscal compact in early summer. Chancellor Angela Merkel is a prime backer of the compact — her party has lost significant support in recent elections to the Social Democrats. She may have to agree to allowances for more public spending to get approval.
The entire continent is holding its collective breath for June 17 elections in Greece, when Greeks vote for the second time in two months on whether to hand the government to anti-austerity leftists who vow to default on the nation’s debts rather than enact the compact. Such a move could roil financial markets worldwide.
“The cliché that’s emerging is that it’s a contest between anger and fear,” said Ben Tonra, professor of European politics at University College Dublin of the Irish vote. “Anger at the way that we have been manipulated and screwed around by European institutions to support private bankers and anger at austerity, set against fear of the unknown and fear of not having enough money to run the country come 2013.”
“Nobody likes austerity. Nobody likes having their wages cut and their taxes go up, but the anger derives from the fact that the European institutions have been seen as the bad guys in this,” Tonra added.
In Germany, voters appear angry at their leaders for the drive to bail out what they see as profligate Europeans to the south. However, some Europe analysts say little can be done to reduce the power of EU elites who have been steadily restricting nations’ sovereignty via regulation from Brussels.
“The fiscal compact is in many ways just the cherry on the cake which has already been baked and served to the electorate,” said Thomas Klau, a Parisbased analyst at the European Council on Foreign Relations, a think tank.
Even so, some European voters aren’t willing to swallow the treat, made clear by recent parliamentary losses for incumbent parties in Greece, Spain, Portugal and Italy. François Hollande de- posed Nicolas Sarkozy in France’s presidential election by hammering at his support for the austerity measures.
“Austerity measures are only an excuse for enforced social changes ... connected to international capital and bankers,” said Marko Tratar, 38, professional chess player from Ljubljana.
Slovenia’s parliament approved the fiscal compact in April but has yet to face voters on the issue. On Wednesday, Slovenian trade unions forced the government into making concessions on public spending cuts by threatening to get its political allies to force a public referendum on the austerity measures.
The last time that happened, in June, 72% of voters rejected job and pension overhauls. Protests against corruption and austerity measures brought down two Romanian governments this year, and Dutch Prime Minister Mark Rutte stepped down in April when his party’s coalition partner refused to support a budget that included spending cuts.
The Indignado (the Outraged) movement that began in Spain, where unemployment is 24%, and spread to Italy and Greece, celebrated its one-year anniversary this month with a protest march of 100,000 people in Madrid. They vow to continue until Brussels listens. “In practice,” Rivas says, “Europe has aligned with the markets, not its people.”