There have been a number of landmarks on the way to today's extraordinarily low interest rates, some of them just shocking from a market historian's standpoint. The latest example: 10-year Treasury yields recently dropped below 2 percent for the first time in more than 50 years.
Some perspective will show just how far below normal those yields are, but in broad terms, this means that the current depression in savings account interest rates could not only sink lower, but may last longer than originally expected.
Treasury yields reach new lows
Early September's sub-2 percent yields on 10-year U.S. Treasury securities are not just slightly unusual--they are far outside the norm for bond yields. In other words, the current interest rate environment isn't just a little low; it is completely out of whack with historical precedent.
To give you a feel for the history, here's where 10-year Treasury yields were at the start of each of the last five decades:
1970s: 7.08 percent
1980s: 12.64 percent
1990s: 8.65 percent
2000s: 6.02 percent
2010s: 3.83 percent
Obviously, the 2010 figure of 3.83 percent stands out as being much lower than the other figures on this list. And yet, as low as that is, Treasury yields today stand at barely half of that level.
What makes these low yields sting even more is that we are no longer in the low-inflation environment of the past two years. Inflation was actually negative in 2009, and a mild 1.6 percent last year. By the middle of 2011, however, year-over-year inflation had risen to 3.6 percent. On a purchasing-power basis, this means that interest rates are losing power even more quickly than the absolute yields would suggest.
Low Treasury yields are often associated with a soft economy, and to be sure, confidence in the recovery has plunged in recent months. However, the extreme lows in Treasury yields suggest there is something else going on here. Investors are panicking, looking for a safe haven. Treasury securities are still regarded as such a haven, and investors are willing to pile into them even though they offer minuscule yields. In today's environment, just the prospect of getting your money back is enough to attract investors.
Savings account interest rates getting whipped by falling yields
While bond yields have some differences from savings account interest rates, activity in the bond market is of interest because it is a day-to-day indicator of interest rate trends. As recently as late July, 10-year bond yields were above 3 percent, and by early September they had fallen below 2 percent. Does that mean that a similar fate awaits savings account rates?
The answer of course is no, in part because savings account rates don't have a full 1 percent to lose any more. The other reason is that interest rate movements often act like a whip, with more extreme changes the farther out you go. Savings accounts are further in, on the short-term end of the whip. This means the dip in savings account rates may not be so much deeper as longer. The bond market is settling in for a long period of low interest rates; depositors would be wise to prepare accordingly.