Since Paul Volcker crushed inflation back in 1980 bond yields have made new lows with every cycle.
10 year US Treasury notes peaked at 15% in 1981, and have fallen consistently till the lows of 3.5% in 2003.
During this period real estate values boomed as capitalization rates fell and the cost of borrowing tumbled.
Refinances further fueled the mortgage banking business, bringing profits to finance companies.
Companies like GE, which based their growth on this trend will now see that portion of their earnings disappear, never to return again.
STRATEGY
For diversified companies, reduce expectations of future growth from financial activities. Explain to senior management and the board that lower interest rates will not happen again - ever.
For finance companies, explain to senior management and the board that the competition in the finance arena is about to get as tough as it gets, with more competitors chasing every deal, and lowering profits in order to compete.
TACTICS
Asset and Liability Management will dominate the discussion on adding assets and liabilities.
As the Fed moves to more market-based allocation of Fed Funds, expect to see more volatility at the short end of the curve.
Lengthen liability maturities and focus on solid spreads.
