Interest rates: How low can they go?

Market Analyze

(MoneyWatch) The 5-year Treasury bond ended last week at a record low -- 0.59 percent annually.  The Federal Reserve's database goes back to 1990, and rates have been on a downward march for the past 23 years from over 9 percent to near zero (see chart below).

Falling interest rates have resulted in a raging bull market for bonds. Experts have been saying for years that rates have nowhere to go but up. As usual, the experts were wrong. Even the downgrading of U.S. government debt by Standard & Poor's last year didn't stop the bond rally.

So if you think the bond rally can go on much longer, think again. Though I normally don't predict anything determined by markets, this time it really is different. The answer to the question of how low can they go is simple: The 5-year Treasury bond rate can fall no more than 0.59 percent. They can't turn negative, at least on a nominal basis. But if anyone is willing to lend me $100 on the promise that I'll pay back $99 next year, please leave a comment and I'll send instructions on where to send the money.

Data from Federal Reserve

The implication is clear that the bond rally of the past two decades must nearly be over. This isn't to say I'm foolish enough to predict that rates are going to increase. The downside risk is more than the upside gain, however.  

My strategy is tostash my cashat banks and credit unions that pay rates many times the 5-year Treasury rate and that offer lenient early withdrawal penalties.

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.