LOWER FOR LONGER

MetLife thinks it’ll take at least a decade for interest rates to get back to normal

Insurance companies generally work like this: They take money from lots and lots of people, throw it into a giant pile and then invest that pile in relatively safe assets like corporate and government bonds.

Ideally, those investments produce enough income so that when bad, expensive things happen to the people that bought insurance policies, the insurance company can easily foot the bill.

For that reason, interest rates—which influence investment returns—are very important to insurance companies. In turn, insurance company views on interest rates should be important to the rest of us, as we ponder the most important question in the financial markets right now: When, and how much, will interest rates rise?

US insurer MetLife has a simple answer. Interest rates wll remain low for a long, long while. The company has good reason to know. MetLife said low interest rates weighed on profits in its most recent quarterly results. John Hele had this to say (per SNL Financial):

A key driver of this charge was an assumption change on how long it would take for the 10-year treasury yield to reach a normalized level. We are now assuming it takes 11 years for the 10-year treasury yield to increase to our normalized assumption of 4.5% versus three years previously.

Keep in mind that the 10-year Treasury note hasn’t consistently yielded around 4.5% since the heady days of the housing bubble.

Eleven years, for God’s sake. While that sounds like a bit much, their extremely cautious approach makes a bit of sense in light of the current stat of the global economy. Hele again:

We talked to a lot of economists and academics on this and looked at the global economy, I think given this year compared to even a few years ago where there was much more optimism about the recovery of the world economies, we see a much slower growth for now and for the foreseeable future.

Also, Hele’s remarks highlight the fact that global economic conditions—a slowing China, fragile emerging markets and still-sluggish Europe—are putting broad downward pressure on interest rates. That downward pressure comes even as the US Federal Reserve preps the market for the possibility that it could raises its benchmark interest rate at its next meeting in December. But even as the Fed preps for its first hike in almost a decade, other central banks have been moving in the other direction:

  • The Bank of England, which has been in something like a game of chicken with Fed, sent stocks and the sterling reeling when it said it wouldn’t raise rates until spring 2016 at the earliest.
  • The European Central Bank, faced with the prospect of a sputtering euro zone recovery, is being pushed to expand its monetary stimulus program.
  • The Bank of Japan,whose own massive stimulus program hasn’t been able to stimulate much, is getting backed into a corner.
  • The People’s Bank of China has been pulling out all the stops to fight the world’s most ominous economic slowdown.

All this is to say that, Fed hike or no Fed hike, interest rates may stay low for a good, long time.

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