Rates are relatively stable today. Yesterday, the EU and Greece communities came to agreement on a $146 billion assist program. Normally, this would cause money to flow back from “safe haven” spots, such as US; but there is still concern that the European financial crisis might spread. Prevailing thought is that this will take some weeks “to unwind.” Nonetheless, for the time being for Greece, the high yields will no longer affect their borrowing costs since euro zone partners and the International Monetary Fund will effectively cover Greek credit needs for the next three years at lower rates of 5 percent or less.
So, on this positive reality for them, and the positive economic outlook domestically, bond interest rates should have upward pressure — except for the ongoing concern that the Eurozone might not be out of the woods yet, in terms of unfolding challenges. The reality that this bailout was pressured to conclude by the deterioration in market expectations with regard to Portugal and Spain (and Ireland and Italy) gives you some picture that the market is not totally settled on this issue — and the remaining ongoing weaknesses in the financial picture for that region.
On additional news, which should be somewhat troubling to all of us in financial lending, we are now in a dynamic where banks have no incentive to lend. What they are borrowing from the Fed discount window at 0.25%, they are reinvesting in Treasury Bonds at 3.70% — a three and half percent profit at no risk to them. Holdings of Treasuries and agency debt by banks rose each of the past five weeks, an increase of $63.2 billion to $1.5 trillion, according to Federal Reserve data. At the same time, commercial and industrial loans climbed less than 1 percent to $1.27 trillion and are down 23 percent from the record high level in October 2008. This is likely the elephant in the garden that’s keeping interest rates low, even in the face of news out of Eurozone that should have worked to spike the rates — that being a significant increasing demand from banks.
And to me, this is a problem: Despite what happy news the government is conjuring up with regard to “economic progress”, if the lending institutions continue to hold back on credit, there is no economic engine that is truly in place to cause a true and factual economic recovery. Smoke and mirrors, otherwise.
And I don’t know that I necessarily disagree with the banks, who can take an automatic no-risk profit rather than to gain higher lending yields in a challenging economic environment. The banks — as well as ever other commercial entity — are always first and foremost self-serving and self-preserving. On the other hand, they can self serve to the point that the whole thing goes down.
And it’s not that they’re making 3.5% on depositor money: Because of the laws related to “fractional banking” (whereby the bank can borrow ten times the amount on deposit), the number is much larger for profit for them. A very large bank informed me this week that, if a depositor brings $10,000 new money to a bank, they will allow the savings rate to go up from 0.3% to 1.5%. So, they’re giving 1.2% additional interest on the money — $120.00 annually. But, that $10,000 allows them to borrow $100,000 from the Fed window at a no-risk gain of 3.5% — $3,500 annually. Interesting scenario — and unhealthy to the country, in my opinion — as the rest of you in lending already comprehend.
If such were possible, the Fed should close this gap: raising the borrowing rate (while keeping benchmark rate low) thus taking away this non-lending incentive. And thus truly doing an action that will improve the economy.
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