August 29, 2011
The economic and market turmoil of the last few years has sent many investors to the safety of the bond market, especially the market for US Treasury securities. With a flood of money coming in, bond prices have risen and interest rates have fallen to record lows. Low rates affect different people in different ways. Here are a few of them:
- Lower mortgage rates. This one is obvious, and can mean a lower monthly payment, or home ownership for people who might otherwise be renters. Home ownership tends to drive other economic sectors such as appliances, furniture, lawn care, etc, so that's a plus. But despite low rates, some potential buyers are unable to buy due to tightened lending requirements - subprime is dead, for now.
- Lower savings rates. This angle gets the most attention from retirees, many of whom have for years supplemented their retirement income with bank interest. Rates have gotten so low that some banks may start to charge for holding depositor funds. Some of the recent market volatility may be due to novice investors seeking what they can't get at their bank - meaningful interest income. Unused to volatility, they may actually cause more of it through frequent deposit and withdrawal activity driven by anxiety.
- A hamstrung Federal Reserve. For 30 years the Fed has often used interest rates as a spur to the economy. But with rates so low, lowering them further offers little leverage. Economists have been asking if the Fed is "out of bullets." Some have insisted that they are not. But the more they insist, the less I believe it. This will limit the government's ability to help our economy out of recession.
So what do low rates mean? They reflect a lack: a lack of confidence, a lack on inclination to invest. And the answer to that lack? Economic growth. Growth means more jobs, more consumer purchasing power, more tax revenues for governments at all levels. Next year is a presidential election. You can be sure to see and hear plenty of prescriptions for growth from both sides of the aisle. If recent history is any guide, our only real hope is growth from the private sector as the lesser of two evils.
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).