Number of the Week 1%

1%: the interest rate on IBM’s most recent three-year bond.

This week, IBM set a sort of milestone in the bond market’s recovery from crisis: The iconic computer company borrowed $1.5 billion at the bargain-basement interest rate of only 1%.

IBM’s cheap money, though, exemplifies the costly trade-offs involved as the Federal Reserve seeks to nurse the economy back to health.

With markets expecting the Fed to keep its target rate somewhere between zero and 1% for at least the next two years, borrowing for short and long periods is extremely cheap. That’s great for big companies and banks, but it’s coming at the expense of savers — a group whom, in the longer term, the U.S. needs to encourage.

U.S. corporations have taken full advantage of low interest rates, going on a bond-issuing binge that has left them with tons of cash, which they appear to be holding largely as insurance against a new bout of financial turmoil, rather than spending on new hires. Nonfinancial companies were sitting on about $8.4 trillion in cash as of the end of March, or about 7% of all company assets, the highest level since 1963. Even before its bond issue, IBM had $12.3 billion in cash and short-term investments, which accounted for about 12% of all its assets.

Big banks, for their part, are seeing bumper earnings as they make use of cheap money and help companies issue all those bonds. Even as their lending continued to shrink, they generated more profits in the first quarter of 2010 than they have since before the recession, according to the latest data from the Commerce Department.

Meanwhile, though, savers are seeing some of the worst nominal returns in decades. As of June, the weighted average interest rate on deposits, money-market funds and other highly liquid investments stood at only 0.29%. Returns on riskier investments aren’t great, either: The average yield on near-junk bonds with maturities close to 30 years stood at about 5.9% this week.

To be sure, the Fed doesn’t have a lot of room for maneuver. If the economy is still struggling, it can’t risk raising rates. But in the debate over whether the economy should be supported through further government stimulus or Fed easing, it’s useful to remember that low interest rates aren’t cost-free, great as they may be for the folks at IBM.