Interest Rates and Economic Forces

For the balance of the year, safe assets are predicted to provide low returns. For example, the U.S. 10 Year Treasury Bond is now yielding around 1.5%. Returns like that don’t exactly light a fire. When a decade-long investment provides a nominal return that is below inflation, it doesn’t signal a fabulous economic situation. In fact, it seems to signal caution, and points out that things are not exactly has hunky-dory as some media outlets would lead us to believe.

Several forces are at work. Skepticism about growth of the economy. Falling real wages – despite the fact that we have had a strong comeback in unemployment. Dissatisfaction with the overall direction of the economy, which is below what government statistics are demonstrating.

While low returns in the U.S. definitely look and feel terrible, there are more difficult situations around the world. Interest rates in some countries, such as Japan, Switzerland, and Germany, are actually negative for the next decade. As an investor, choosing between a negative 0.7% foreign bond and a +1.5% U.S. treasury bond, suddenly becomes a no-brainer.

The global environment will likely keep a lid on any rise in interest rates in the near future. The Brexit situation gave cover to the Federal Reserve to take hikes off the table for the time being, and the markets certainly aren’t pricing in a hike.

- Greg Stewart, CIO