A few weeks ago we looked at the possible impact that the earthquake and resulting tsunami a half a world away in Japan might have on our interest rates here in the United States. The view expressed in my March 15 article, which can be seen here, was that there would be a flight to quality leading to lower rates on long-term Treasury securities. Looking back now, we see that this is exactly what happened as prices indeed bumped up and as investors dumped stocks in favor of the relative safety of Treasury issues, causing longer term yields to decline.
Just before the tragedy occurred in Japan, the benchmark 10-year Treasury rate was running around 3.5%, then dropped down to around 3.22% within a week, where it bounced around for a few days before returning to its current level, back around 3.5% to 3.6%. Economists are divided over where we go from here: Some say we have come through the event and are back to normal (at least in terms of the financial effects), while others say there is more fear and uncertainty to be dealt with.
The point to be taken is that long-term rates move quickly in the face of uncertainty from global events—both natural disasters, such as happened in Japan, and social upheavals in the Middle East—and it is impossible for even the most astute economist to predict when such events will occur. Rrates are still quite low from a historical perspective, and the best we can guess at this point is they will probably rise in the near future. But events well beyond our control and beyond our ability to predict could change everything in a heartbeat.
As to short-term rates, prime is at 3.25%, where it has lived for a long time. And it doesn’t look like the Federal Reserve is in any hurry to raise those rates. Some economists are predicting flat rates into 2013, while others say there will be an increase in 2012. LIBOR could be another story, as the 30-day rate averaged 0.32% in February and 0.3% in March; but it could be trending higher later this year as inflation becomes a big concern in Europe. For those of us here in south Louisiana who are on floating rate loans indexed to LIBOR, this potential rise could be an issue in the fourth quarter of the year.
Bottom line: Rates are still low, low, low and are probably going to be in the same range for the next 90 days. We’ll check them again in July.
(Brian Andrews is a certified mortgage banker specializing in the financing of commercial real estate. His business is Andrews Commercial Real Estate Services and he can be reached at firstname.lastname@example.org.)