Tahoe Market Pulse: Here’s why interest rates will stay low
March 18, 2015
Interest rates have been rock-bottom for several years, but now there's speculation that the Fed will raise rates as early as June.
Does that mean the period of low rates will be over? Not so fast.
Any Fed hikes will affect short-term rates, and they will be very tepid at first. What happens to long-term rates will be up to the demand for credit and expectations for inflation.
Here's the good news: The supply side of the market is putting downward pressure on interest rates. There is a decline in the rate of growth of Treasury debt because the U.S. deficit is much improved.
The deficit declined from $1.4 trillion in 2009 to $506 billion in fiscal year 2014, and it is projected to be even lower in 2015. The bad-news media seem to avoid this story.
Another obvious reason for the low rates is quantitative easing. While the Fed has backed off QE, many central banks around the world are just now starting.
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That's why nearly half of all bonds here and overseas yield less than 1 percent, in good part because governments issued short-term bills and notes to keep their annual interest costs down.
Raising rates to fight inflation that doesn't exist would further undermine their weak economies and risk outright deflation.
The Fed also understands that when they begin to raise rates, that will further strengthen the now-rising dollar and negatively impact profits for U.S. firms with overseas operations, a prospect not being lost on investors.
Some day rates will slowly rise to a benign level a few years out. For that reason, I'm very comfortable with preferred stocks, especially the ones I wrote about last week and on January 29.
Dividend-paying stocks remain attractive for those seeking income with some growth. In short, there isn't a need to fear higher rates. Some day, yes. Some day soon, no.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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