Friday, December 14, 2012

ZIRP: How Long?


Click to enlarge.

I'm not suggesting that World War III will soon break out, but I am suggesting that ZIRP may be here for far longer than most think possible. We're currently "only" four years into the chart.

November 18, 2009
Fed official: Rates could stay put until 2012

Federal Reserve Bank of St. Louis President James Bullard said policy makers may not start to raise rates until early 2012 while facing a “too low for two long” argument that may “weigh heavily” on the central bank.

August 17, 2011
Plosser Says Federal Reserve May Have to Increase Rates Before Mid-2013

Charles Plosser, president of the Federal Reserve Bank of Philadelphia, said the Fed will probably need to raise interest rates before mid-2013 and that policy makers should have waited to see how the economy performed before pledging to hold rates at record lows for two years.

January 25, 2012
Fed: Benchmark Rate Will Stay Low Until ’14

Federal Reserve officials said their benchmark interest rate will stay low until at least late 2014 and anticipate that unemployment will remain high and inflation “subdued.”

December 12, 2012
Fed Officials Forecast Main Rate to Stay Near Zero Until 2015

A majority of Federal Reserve officials don’t expect to raise the main interest rate until 2015, when they forecast the jobless rate will fall to between 6 percent and 6.6 percent.

The date of the interest rate hike is a procrastinator's dream. It *always* appears to be about 2 years away. You know what they say. Never put off for tomorrow what you can do two years from now! This is no doubt a big shocker to the ivory tower crowd.

For what it is worth, this has definitely been one of my better calls since starting this blog.

January 31, 2008
The Death of Real Yields Continues

If I had but one prediction, it would be that it will grow increasingly difficult to make money off of money going forward. That's why I continue to track what I call the death of real yields.

Source Data:
St. Louis Fed: 3-Month Treasury Bill: Secondary Market Rate

14 comments:

Stagflationary Mark said...

If you read my "death of real yields continues" link you will see that I did make one mistake.

I didn't think a TIPS yield could actually fall below 0% in an auction. My bad!

April 21, 2011
5-Year TIPS Auction Results

Note About TIPS: Should the accepted auction yield be 0% or less, the security will not have regular semiannual interest payments. The yield will be adjusted for inflation throughout its lifetime, thus posting changes at maturity (or sale). In this case, where the accepted auction yield is 0% or less, the interest rate will automatically be set at 0% (never anything lower) for all buyers.

That was in the old tender instructions for TIPS auctions. You can see why I might have mistakenly assumed that 0% was the floor.

That section of the instructions has since been removed.

Stagflationary Mark said...

I should also add that the interest rate still can't be below 0% but there is no limit to how high people can bid up the price. The effective real yield can therefore turn very negative, and has.

Mr Slippery said...

I'm not suggesting that World War III will soon break out, but I am suggesting that ZIRP may be here for far longer than most think possible. We're currently "only" four years into the chart.

I think ZIRP will be here until World War III breaks out or the equivalent: foreign creditors repudiate US bonds. There is no other politically acceptable solution.

Stagflationary Mark said...

Mr Slippery,

I think ZIRP will be here at least until my Merrell waterproof hiking shoes wear out (your recommendation! ;)).

It rained hard today. I just put another 4.5 miles on them. Loved every minute! Such deflationary recreation! It's like real prosperity was literally falling from the sky.

In my opinion, it was definitely just like that. There's nothing Ben Bernanke could have done to enhance the experience. Further, the less money I think I will earn on my savings in future years the less money I will spend now to support this economy through discretionary spending. That's not my opinion. It's a fact.

Will the shoes ever wear out? They still feel brand new. I'm well over 200 miles on them so far. I am very pleased with the purchase. It has been a life changer for me up here in the Seattle area. Had I bought them a decade ago I'd probably have no extra weight to lose. Go figure.

Luke Smith said...

The only inflation-indexed treasury bond with a positive yield is the 30-year at .31%. So in real terms, won't the Fed have to end its ZIRP when the last yield is below zero?

http://research.stlouisfed.org/fred2/series/DFII30?rid=18&soid=1

Stagflationary Mark said...

Luke Smith,

I guess it depends on how you look at it. In real terms, the Fed has a less than ZIRP policy and it has only gotten worse. Inflation was actually kind of high in WW2.

August 3, 2011
Charting the War on Savers

In the charts that follow I'll be comparing the "safe" investment returns of World War II to the "safe" investment returns of today. Here's one reason for the comparison. Just look at that World War II debt.

Rob Dawg said...

Yup. I got this one exactly wrong. I thought the appetite for bonds would be exhausted long before now.

Of course the point is to help the banks. from that perspective the punchbowl stays through 2014. The 2015 bit? Won't catch me even guessing about any aspect of the economy that far out. Two years is pushing things.

CP said...

lol

"The date of the interest rate hike is a procrastinator's dream. It *always* appears to be about 2 years away."

Mr Slippery said...

I think ZIRP will be here at least until my Merrell waterproof hiking shoes wear out

They are great! I just trudged through 6" of snow with some, dry as a bone. Unfortunately, waterproof does not mean cold proof. I had to head back before I wanted to due to the cold. Working on a remedy for that.

ZIRP actually works for me so I shouldn't complain to loudly.

Stagflationary Mark said...

CP,

I've reused the "procrastinator's dream" a few times in my life.

The joke never seems to get old to me, lol.

Stagflationary Mark said...

Rob Dawg,

I thought the appetite for bonds would be exhausted long before now.

My appetite for TIPS and I-Bonds was pretty much insatiable (especially when real yields were above 2%). Now I'm just holding to maturity for the most part and crossing my fingers, lol. Sigh.

In all seriousness, I simply figured that it is our debt that is propping everything else up. If I am financially ruined, at least I won't go alone. My tax preparer said that must give me little comfort. I agreed that it didn't.

Stagflationary Mark said...

Mr Slippery,

ZIRP actually works for me so I shouldn't complain to loudly.

I could certainly be doing worse. I can't complain that I locked in real yields before ZIRP seriously infected the long-term bonds.

I also can't complain that the consumer price index is lower than I would have guessed back in 2004 either (stagflationary name gives me away). Plan for the near worst, hope for the near best.

TJandTheBear said...

ZIRP is the embodiment of the last great bubbles -- bonds & government. These too will burst, just as all have before them.

The timing is the big question, but one thing for sure is there will be little warning.

Stagflationary Mark said...

TJandTheBear,

The timing is the big question, but one thing for sure is there will be little warning.

That is indeed the big question. As they say, Rome didn't fall in a day.

As for me, I think there's a good chance that I will not regret filling my IRA with one 1.89% 29-year TIPS bond in January of 2011.

In theory, thanks to compound interest my IRA's purchasing power should grow by about 73% over the next 29 years.

In any event, so far so good. Thanks to renewed ZIRP activities, almost all of that appreciation has already happened. Go figure.

My original plan remains the same though. Hold to maturity.

May you live in interesting times

We do. Sigh.