Washington’s blunders create a ‘Duck Soup Windfall’ for savers

U.S. Treasury bonds and certificates of deposit are now paying rates of interest that were unimaginable just a year or two ago. Ditto corporate bonds. Annuity rates are way up. Inflation-protected Treasury bonds (a favorite topic, and the only bonds I own) are now paying guaranteed rates of interest, on top of inflation, that market experts were saying until recently that we’d never see again.

This may not be great news for people who bought these investments earlier on, when prices were higher and yields were lower. But they are excellent for anyone who wants to buy now. The biggest beneficiaries are those who are just retiring now, or heading toward retirement pretty soon.

That includes the estimated 90,000 people who start claiming Social Security every month and those either retiring or heading that way.

Certificates of deposit (CDs) that are both call-protected and insured by the FDIC are now paying up to 5.5% interest for one year, 4.75% for five years and 4.5% for 10 years. Twenty-year zero-coupon Treasury bonds are yielding 5.1%. 10-year tax-free municipal bonds are paying up to 5.3% interest. Vanguard’s Long-Term Corporate Bond Fund, which invests in investment-grade paper that typically matures in more than 20 years’ time, is yielding 6%.

Annuity rates for 60-year-olds are now a third higher than they were just two years ago. A woman of 60 investing $100,000 in a life annuity today can secure for herself an income of $6,800 a year. In 2021 she’d have gotten just $5,000 a year. (The figures for a man are $7,000 and $5,200.) 

As for inflation-protected Treasury bonds: You can now secure a guaranteed income of inflation plus 2.3% for as much as 30 years. 

Longer-term TIPS bonds have not offered deals this good since the financial crisis (and rarely even before then). Thirty-year TIPS bonds, which were first created in 2010, have never done so.

Why are these interest rates so good?

You can thank the Federal Reserve, which kept rates too low for too long, thought inflation was “transitory,” and has now been racing to catch up. 

You also can thank the people who passed the so-called “Inflation Reduction Act” —which was apparently named by the same Orwellian department that hails a “Clean Air” act or “Clean Water” act every time Congress guts environmental regulations and allows more pollution.

You can also thank everyone involved in producing the eye-watering federal budget deficits that are flooding the market with more Treasury bonds, inevitably driving down the price and driving up the yield. (Bonds are like seesaws: When the price goes down, the yield, or interest rate, goes up.) 

Little-known fact: While the economy is overheating and unemployment is at historic lows, this year’s federal budget deficit, at 5.8% of GDP, matches the peak deficit that Franklin Roosevelt ran at the depths of the Great Depression, in 1934.

The Congressional Budget Office forecasts that within 10 years the national debt will be $47 trillion, about three times what it was just before the pandemic. The debt is set to exceed the annual gross domestic product, this year or next, for the first time since the Truman administration.

To the extent that in a democracy the people get the government they deserve, we can, of course, also thank ourselves for this situation.

A friend pointed out that rates have also risen in countries overseas, arguing that the factors involved aren’t purely domestic to the U.S. There again, the U.S. Treasury market underpins the entire global financial system, so rises in U.S. long-term rates would be expected to affect bond markets elsewhere.

Whether deals are going to get even better is another matter. Some market sources argue based on history that a “real” yield of inflation plus 2.5% a year is a reasonable target. If that’s true, bonds may fall further and yields keep rising. There are some reasons to question that, though. There is historical evidence that interest rates seem to be in structural decline. And most of the data suggesting “real” rates may go higher come from the era before the creation of inflation-protected bonds (which were only launched in the U.S. in the late 1990s, and in Europe in the 1980s). Before then, people had to buy regular Treasury bonds and try to guess what inflation would be.

They guessed way too low in the 1960s and 1970s, as inflation came in much higher than expected. And then they guessed way too high after Fed chairman Paul Volcker crushed inflation in the early 1980s. 

In September 1981, you could buy a U.S. Treasury bond paying a guaranteed 15.2% annual interest for 30 years.

Average inflation over the next 30 years? Er…3%. 

Data going back to the late 1920s say that the average real rate of return on longer-term Treasury bonds has been somewhere between 0.85% a year and 1.9% a year, depending on how you calculate it.

TIPS removes the guesswork that used to be involved in buying regular bonds, so the calculations are likely to be different. The market may not demand as much compensation for taking “inflation risk” if it’s not taking the risk.

Either way, rates today across the board are so much better than they have been for nearly a generation — all thanks to the shenanigans going on in Washington.