Two Mind-Blowing Numbers About the US Economy

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Are US Interest Rates Headed Back to Zero — or Even Lower?

We live in unusual and unsettling economic times. Today’s evidence of that came via two mind-blowing market numbers, 1.6% and $15 trillion.

The first represents the yield on 10-year U.S. Treasuries, which briefly fell below 1.6% on Wednesday, hitting the lowest point since 2016 before turning slightly higher. Touching 2.12%, the yield on the 30-year Treasury moved near the record low of 2.089% recorded three years ago.

Those ultralow yields are driven by investors worried about the slowing global economy and a possible U.S. recession triggered by President Trump’s escalating trade war with China. In response, they’ve piled into relatively safe government debt.

Ten years ago, the idea that the U.S. national debt could swell above $22 trillion and rates would still be near record lows might have been laughed at. But that’s the reality today.

The second number, $15 trillion, represents the global supply of debt that is trading at negative yields — that is, investors paying governments to hold their money, a reversal of the usual arrangement.

There are currently at least 11 countries that have negative yields on their 10-year debt, Bloomberg News reports. For example, the German 10-year note was at -0.57% Wednesday, while the Japanese 10-year was at -0.19%.

According to Deutsche Bank, there is now $15 trillion worth of bonds trading at negative yields, or about 25% of the market, and that number has more than doubled in the last year.

Could the U.S. Be Next?

Long seen as one of the safest places in the world to store money, U.S. Treasuries have avoided negative yields so far, but Joachim Fels of investment giant Pimco says the next recession may change that.

“Whenever the world economy next goes into hibernation, U.S. Treasuries – which many investors view as the ultimate ‘safe haven’ apart from gold – may be no exception to the negative yield phenomenon,” Fels wrote Tuesday. “And if trade tensions keep escalating, bond markets may move in that direction faster than many investors think.”

While short-term worries about trade wars and recession are no doubt adding to the downward pressure on yields, Fels argues that there are long-term causes of the global move toward low and negative rates. Technology is lowering the cost of capital, reducing demand for investment capital, while an aging society increases the demand for the preservation of capital, even at the cost of negative returns. Together, those trends point toward lower yields in the long run.

When the next recession comes, the Federal Reserve may have to reduce interest rates back to zero, as it did during the previous recession, Fels says. But against a backdrop of deep technological and demographic change, zero interest rates may not be enough to restart the economy. If that’s the case, “negative yields on U.S. Treasuries could swiftly change from theory to reality.”

Bank of America strategist Bruno Braizinha told Bloomberg News that while he isn’t predicting that the U.S 10-year will go negative, he could see it falling below 1% if the Federal Reserve starts aggressively cutting rates in response to a slowdown. “Yield is evaporating globally,” Braizinha said. And if the Fed does drop rates back down to zero, Braizinha says that negative U.S. interest rates are a distinct possibility.

Number of the Day: $63 Billion

The U.S. Treasury collected $63 billion in tariffs over the 12 months through June up from about $30 billion a year before, The Wall Street Journal reports. Tariff revenue is on pace for $72 billion a year, and could hit the $100 billion level President Trump touted recently if his latest tariffs on goods from China take effect as scheduled next month.

“There is one caveat, however,” the Journal’s Josh Zumbrun writes. “For every dollar brought in by the new tariffs, a dollar has been authorized to fund rescue programs for farmers who have been harmed by retaliation from China and other countries. The U.S. authorized $12 billion in farm rescue funds in 2018 and an additional $16 billion this year, for a total of $28 billion.”

New Data Show Why Trump’s Short-Term Health Plans Are Called ‘Junk Insurance’

Many of the short-term health insurance plans being promoted by the Trump administration spent a relatively small fraction of the premiums they collected last year on patients’ medical claims.

Modern Healthcare reports that the five health insurers that collected the most in 2018 premiums from short-term insurance policies spent just 39.2% of every dollar on medical care. The rest went toward administrative expenses or was kept as profit. The data was published last week in the National Association of Insurance Commissioners' 2018 Accident and Health Policy Report.

Under the Affordable Care Act, insurance companies are required to spend 80% of the money they take in from premiums on health care costs and quality improvement. Otherwise, they must pay rebates to enrollees. For comprehensive major medical plans purchased by individuals overall in 2018, the average ratio of medical payments to premiums collected was about 73%, according to the insurance commissioners’ report.

In contrast to Obamacare-compliant plans, short-term plans don’t offer as comprehensive benefits, and they can deny coverage to people with pre-existing medical conditions or charge sicker patients more. As a result, they tend to be much cheaper — but their far lower spending on medical claims is “a stark reminder that short-term plans benefit insurance companies more than the patients who purchase them,” Modern Healthcare’s Shelby Livingston writes. For that reason, critics call them junk plans. “It does raise the question of what kind of value people are getting from these plans," Cynthia Cox, a vice president at the Kaiser Family Foundation, told Livingston.

But the Trump administration has sought to expand access to such plans, and it allowed insurers to extend such policies to a year, up from a previous maximum of three months. Administration officials have argued that the plans give Americans more options for less expensive coverage.

Poll of the Day: Sanders Has the Edge on Health Care

Potential Democratic primary voters give Vermont Sen. Bernie Sanders the edge over his rivals for the party’s 2020 presidential nomination when it comes to understanding and dealing with health care, a new poll from Politico and Morning Consult finds.

One in four potential primary voters say that Sanders “has the best understanding of the problems with the U.S. health care system,” compared to 19% for Biden and 18% for Sen. Elizabeth Warren. A similar percentage said Sanders “is most qualified to solve the problems with the existing U.S. health care system.”

The voters polled also ranked health care as their most important policy issue, ahead of the economy and what pollsters termed “seniors issues” like Medicare and Social Security.

Sanders, of course, has championed a transition to a single-payer “Medicare for All” system under which every American would be enrolled in a government-run insurance plan. His plan has been at the center of Democratic debates over health care, with moderate rivals arguing against its proposed elimination of private insurance, among other criticisms.

Many voters who watched at least one night of last month’s Democratic primary debates want to hear more about both Medicare for All and the Affordable Care Act, with 34% saying the single-payer plan wasn’t discussed enough and 37% saying the Obama health care law should have been discussed more. Three in ten voters said Medicare for All was discussed too much, while 19% said the ACA was given too much time.

The poll of 797 potential Democratic primary voters was conducted August 1 to 3 and has a margin of error of 3 percentage points.

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Today is Purple Heart Day, the 237th anniversary of the award now given to U.S. service members who have been wounded or killed by enemy action. We honor those Purple Heart recipients and thank them for their sacrifices.



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