Feb
Long-Term Interest Rates Likely to Stay Low For Years
Written by Leo FranklinIt was less than five months ago when S&P downgraded US Treasury debt on concerns that the federal budget deficit was growing larger and the pace of long-term economic growth was slowing. Typically, traders will become concerned after a downgrade and sell off the bonds that were downgraded, which will drive interest rates higher.
That hasn’t happened to Treasuries, and rates are actually back below 2 percent on the ten-year note. Rates that are this low present a significant challenge to income investors. 
At least one bond market expert is telling investors to expect more of the same for at least a couple years. Jim Bianco, founder of the well-respected economics research firm Bianco Research, recently said in an interview that rates on the ten-year Treasury note will stay at or below 2 percent for the rest of 2012 and probably longer than that.
The market, for now, seems to be rigged against individual investors. Most Treasuries are being bought by government agencies in China, Japan, or the US. The Federal Reserve is actually the biggest buyer of US government securities.
This is hard to understand from an economic perspective – the Fed is a part of the Federal government and is using money created by the Treasury to buy securities created by the Treasury. Individuals or corporations could not do something like this, but the government owns the printing presses and the Fed is part of that mechanism.
Because of all the Fed buying, the bond market is probably not reflecting economic reality and likely won’t be compensating investors for the real inflation risk for at least several years.
Other income investments not faring much better, either
Investors can turn to stocks for higher dividend yields, but that increases risk. Over the long run, stocks have generally been about twice as risky as bonds. Risk is usually defined as the chance of a large loss and many retirees are uncomfortable with the potential for a large loss since they may need their money to cover living expenses.
Low interest rates may hurt savers, but they could help senior citizens looking at a reverse mortgage. The rates on reverse mortgages are also low right now and you could access the equity in your home relatively inexpensively with a reverse mortgage. The proceeds from a reverse mortgage can be used for anything you’d like, and the money is tax-free. Low rates may hurt income investors, but reverse mortgages can relive some of that pain.
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