Effects of the Global Decrease in Interest Rates

Turkey’s interest rates have fallen considerably. Beyond being the product of optimism concerning the domestic economy, this reduction is actually due primarily to reductions in German and American interest rates. With the U.S.’s latest economic data confirming a slowing economy and even bringing the likelihood of another recession, the Federal Reserve Bank has taken action once again.

With this development, the yield ratios of two-year U.S. Treasury bills fell to 0.46 percent for a short time, the lowest level since 1975, when exports of two-year bonds began. Ten-year bills showed an upward trend, closing at 2.58 percent last week, but this week’s closure at the same yield, 2.58 percent, shows that high demand for securities is going to continue. And there are to be further sales of two-, five-, and seven-year bills this coming week. The Fed plans to sell 2013, 2014, 2021 and 2040 dated bills. In short, the U.S. has started playing a new, big game with its treasury and central bank. These market-influencing maneuvers will, on the one hand, continue the search for a macro-economic solution, and at the same time, mean big opportunities for short-term speculators.

In addition to the Philadelphia Fed Economic Index falling from 5.1 to -7.7, unemployment numbers defied early estimates, increasing by 12,000 to reach the new figure of half a million. With the slowing economy, it is clear that unemployment will remain a problem in the long term. For a while, the American investor was putting her savings into domestic investments, but with these negative signals, she is now moving to the security of government bonds. This factor was combined with the government’s plan to begin buying its own bonds, resulting in long-term Treasury bills seeing a considerable price increase. Because these purchases are made in dollars, the dollar value has increased, pushing its 1.26 price against the Euro.

As addressed above, the Fed’s bond purchases may cause a small increase in the dollar’s value. Here, a certain sector, especially European investors, may begin to move toward a preference for German bonds. Furthermore, with German Central Bank President Weber voicing concerns about the economy, the German 30-year bond saw an increase in its already high demand, bringing its yields to historically low levels (in other words, the price of the bonds increased to historic highs).

The U.S. economy has come to the brink once again, and the “liberal” state is going to support the investor and consumer. Moreover, no matter how low short-term interest rates stay, savers continue to prefer government securities. The U.S., which saw increased savings rates after the 2008 crisis, is once again faced with the problem of low savings. More importantly, this saving cannot seem to be directed to the desired sectors, and consumption is not increasing. If the economy does not gain new momentum, unemployment will continue to increase. Right now, it seems that the U.S. is heading toward a more statist economic approach. Also, the latest battles between Republicans and Democrats have been over assigning blame for economic failures, an issue I will discuss in the next edition.