8.4.16 | Knock-on Impact of Low Interest Rates – Rusty Tweed team
Record Low Yields
The yield on 10-year U.S. Treasuries is at a record low of 1.36% (7/8/2016). Its previous record low was in July 2012 when investors were nervous that Spain needed a full-blown bailout. The recent slide in rates has led to lower prices for bonds and a record high rate of investors buying U.S. Treasuries.
Analysts at LPL Financial think investors will continue to flock to bonds because they “remain more attractively valued compared to their overseas counterparts in Germany and Japan”.
Impact of Low Interest Rates on U.S. Stocks
U.S. stocks are close to their all-time highs. They suffered a hit immediately following Brexit, but have recovered quickly. Companies like Johnson & Johnson (JNJ) – up 20% this year; and Kimberley Clark (KMB) – up 10% his year – have high dividends. This suggests that investors who might normally purchase bonds are instead buying riskier stock in order to get a greater yield and return.
However, whenever U.S. interest rates rise, stocks could take a hit. In addition, a strong dollar impacts U.S. trade as goods made in the U.S. look more expensive on world markets.
Impact of Low Interest Rates on the Real Estate Market
Low interest rates stimulate the real estate sector by making it cheaper for individuals and businesses to borrow money to invest in real estate.
Mortgage rates are tied to Federal Reserve interest rates. When rates are low, as they currently are, a homeowner will pay significantly less across the duration of his/her mortgage for the same priced home. Cheaper mortgages create an incentive for people to buy homes.
Since U.S. interest rates on bonds and CDs are so low, investors and retirement funds are buying increasing amounts of real estate in order to get the rental income, which is significantly higher than bonds or CDs. In turn, this is pushing up rental properties valuations.