60 50 Nominal interest rate Interest rate (percent per year) 40 30 Real interest rate 20 1 0 Falling real Interest rate interest rate lowest in 2012 O. . . . . . . . . . . . . . . .' . . .0 . . .. . . . . . .. 2010 2011 2012 2013 2014 2015 2016 2017 2018 Year Figure 1 Interest Rate 2010 to 2017Real interest rate (percent per year) 4.0 Expectation of SLFQ1-16 rising bond prices increased supply SLFQ1-17 2.9 Interest rate fell 2.0 1.7 1.0 DLF O 36 37 38 39 40 Loanable funds (trillions of 2009 dollars) Figure 2 The Loanable Funds Market in 2016 and 2017.l ECONOMICS IN THE NEWS Interest Rates Low but Fall After a Summer Bond Binge, Signs of Angst Are Growing in the Market Bondholders make the largest returns when interest rates are low and falling. In those con ditions, bond prices are high and rising Bondholders make the smallest returns, and incur losses, when interest rates rise and bond prices fall. So, Whether bond interest rates have bottomed and bond prices have peaked is a big question for bondholders. It's a question that 31:10ka News addressed in mid-2017'. Looking for evidence of a market poised to run out of steam, it noted that high-grade U.S. companies had already sold almost $1 trillion of bonds in the year to July 2017, and less safe companies had issued a record volume of lunk bonds, Whose yields had fallen to 5.8 peroent. As an example, despite the rm's failure to earn a profit3 electric carmaker Tesla. was able to unload $1.8 billion of bonds at a rock bottom interest rate. But there were signs of an end to the low and falling interest rates and the lS-month-long rally in junk bonds. These signs were laid out by Michael Heise, writing in the Fbsanda! Ewes. He notes that the expansion of E55 ENCE 0F TH E STORY thina 15 boosting global trade, debt has been rising I US. high-grade companies sold almost $1 trillion since 2014, the debt-to-lncome ratio has been rising, of bonds in the rst half of 2011 and m the major economies, rms are producing at l Tesla Inc., an unprofitable electric carmaI-ter, full capacity and Will need to increase investment in sold $1.3 billion in bonds at a low interest rate. new capital to sustain \"1331151011 l American businesses had issued a record volume of risky (junk) bonds at an average interest rate If Nchael Heise is correct, interest rates will start to of 5.8 percent. rise and the bond rally will end. I There were signs that an 18-monthlong rally in Sounzu Based on MAE-aghast\"! 14.3317.\" rims 13%qu as 2017 junk bonds was about to end