Global Interest Rates

I have an exciting investment opportunity to tell you about. Here's how it works:

  • Today, you will invest $13,400 to buy a $10,000 Swiss bond.  [note: that is not a typo. You are paying a 34% premium over face value of the bond]
  • I will buy you a $10,000 Swiss bond that pays you 3.25% simple interest each year ($325 of annual interest).
  • At the end of 10 years, you will get your $10,000 back.
  • Add it all up, and your $13,400 investment today returns a grand total of $13,250 after 10 years. Of course, we're not even accounting for the time value of money (i.e. your $10,000 has less purchasing power in 10 years).
  • Wait a second, that sounds like a negative rate of return...right?
  • That is correct. This is not a good investment, yet these bonds are being purchased.

We are truly living in unprecedented times, where Swiss bonds have been purchased with negative yields to maturity for the past two years.

And if you think interest rates are low here in the United States, take a look at government bonds across the developed world:

There are a number of reasons for why global interest rates are so low. I won't delve into those reasons today. Rather, I point this out as a frame of reference for we here in the United States. While are interest rates are quite low relative to our own historical norms, our rates are not at all low when compared to these other countries. Thus, when global investors (whether they are public or private institutions or individuals) where to "park" excess cash for 10-year investments, the highest-returning asset of this group is US bonds.

Broadly speaking, stocks and bonds compete against one another as investment options in the global marketplace. While it's rarely an either/or situation (i.e. owning 100% stocks or 100% bonds), global investors assess the relative merit of stocks vs. bonds. When interest rates on bonds around the world are so pitifully low, it does make stocks more attractive on a relative basis. 

Consider that the Swiss stock market currently carries a dividend yield of 2.44%. While it's true that stocks carry vastly greater volatility than bonds do, it is still puzzling to see that Swiss stocks yield 2.44% (plus any growth in share prices over time), while 10-year Swiss government bonds actually yield a negative rate of return.

the take-away

1) The next time a friend, family member, or colleague confidently tells you that our interest rates are certain to rise dramatically in the future, you can at least cast some doubt on that prognostication -- by pointing to our rates currently being much higher than many other competing nations.

2) As Warren Buffett has consistently pointed out, with bonds all around the global providing these minimal returns, he would much rather own stocks.