Interest rates are falling again. Nobody expected that. Loans are cheaper than ever.
VA year ago it was clear to everyone that bond yields would rise in 2019. That will be the result of a better economy, which will lead to higher inflation. For Bunds with a ten-year term, the banks were expecting a yield of 0.9 percent. Not much, but more than could be earned back then. But now the reality is very different. And that affects loans and stocks too.
The yield on the ten-year government bond has not risen, but has fallen – and significantly. A year ago it was 0.7 percent, most recently it was on the way to the zero line. Meanwhile, the downward slide stopped before the zero line at 0.1 percent. That was the case in 2016, when the return fell to minus 0.2 percent. Translated, this means: investors get less money back than they lent the federal government – a crazy world.
The inflation rate is also falling
This could recur. Economic worries have risen sharply in the past few months. The economic research institutes, the International Monetary Fund and the federal government recently reduced their expectations for this year in a row. Nobody expects a real recession with rising unemployment, stagnating wages and less consumption by the citizens for Germany, but only a growth of about one percent. The last two quarters of 2018 were already sad, Germany only barely avoided a recession.
Lower growth lowers the yields on Bunds because inflation worries then also decrease. Economists now only expect a return of 0.5 percent at the end of 2019, at the beginning of the year it was around 0.8 percent. The Ifo index for business expectations has now fallen for the sixth month in a row. In March the European Central Bank is likely to lower its economic outlook and perhaps even adopt stimulating measures, above all postponing the first rate hike until at least December and very cheap loans for the banks. Both will also weigh on federal bonds.
The two big political issues of the year weigh on all of this: the still unclear Brexit at the end of March, which could end in chaos, even if the markets are not currently expecting it. And the trade war between America and China, which is already weighing on growth and sentiment as a whole. Commerzbank analyst Rainer Guntermann expects that even if both uncertainties are resolved positively, bond rates will not rise significantly. Especially since the American President Donald Trump could exacerbate the trade dispute with Europe. Guntermann is particularly skeptical because he expects lower growth in the American economy, which indirectly also causes the yield on Bunds to fall. It will fall again after an interim high in the summer.
What does all this mean for savers, investors and house builders? Savers will suffer even more. On overnight accounts, there will continue to be interest only for new customers for a few months, for bonds only for long terms and for companies with moderate debtor quality. The interest will then just compensate for the inflation devaluation. With a good credit rating, they are so low that savers lose money in real terms. Shareholders, on the other hand, benefit from the prospect of interest rates remaining low, but suffer just as much from the deteriorating economic outlook, which is reducing company profits, which is already evident when the business results are presented.
The main beneficiaries continue to be those who borrow. On the one hand, there are all those who need an installment loan. It’s currently cheaper than ever, interest rates have fallen steadily. A five-year loan now costs 4.1 percent on average. Real estate buyers and home builders benefit at least from the fact that the expected rise in interest rates for construction loans does not materialize; such loans are almost as cheap as they were at the 2016 low. However, much downward movement is not to be expected. Even so, there are a few winners from the low interest rates.