Interest rates have never been this low for this period of time. Financial advisor and money manager Tim Travis of T&T Capital Management says rates have been declining for the past 30 years.
Debt is inexpensive and that's good news for homeowners and business owners financing long-term purchases like homes and equipment. Tim acknowledges there's a twist, though, that may catch savers, and especially Baby Boomers, off-guard. When retirement is on the horizon, bonds usually offer greater protection from market risks than equities.
"The lack of available yield has pushed these 'savers' into equities, which are also non-coincidentally at all-time highs and there are investors who will take substantial losses when rates start to climb."
Companies have been adjusting to this reality for some time. The strategy behind low rates was meant to stimulate growth but this quote from a 2013 article in the Economist, "Six Years of Low Interest Rates in Search of Some Growth," acknowledges central banks have not reached their goals.
"Big companies have taken the opportunity to borrow in the bond markets, locking in cheap financing for years to come. But the cheap money has not led to the growth-igniting investment spree the monetary policy was designed to encourage. There are some signs of an economic revival in America. But the prospects elsewhere are bleak; Europe’s purchasing managers’ index for March showed a further fall in manufacturing activity while unemployment reached 12%, the highest since euro-area data were first compiled in 1995."
Tim points out that investors should treat their financial portfolios as a business. Reviewing allocations doesn't require a weekly or monthly review of profit and loss like a company, but working with someone dedicated to the markets can lead to profitable strategies that would otherwise go overlooked.
"Covered calls and puts may work well for some individual strategies," he says.
Federal Reserve policies have not worked for another reason, according to Tim. He writes in an article on his website that low rates have bolstered the housing market but growth has been stymied by "government initiatives that have been heavy on regulation and low on job creation."
To look further into the impact of low interest rates and bond yields, click on Tim's article "Average Junk Bond Yield Below 5% for the 2nd Time Ever- How it Impacts You."