Many investors worry about the impact rising interest rates could have on financial markets. It is easy to forget there is an upside: Some consumers will gain from more income and be able to spend more.
Low interest rates have been a boon for most families. Home affordability is close to a multi-decade high, the stock market has more than tripled since its lows and millions of households have been able to refinance their mortgage loans, which in the process has saved thousands of dollars a year. That said, this prolonged period of ultra low rates has had a downside, particularly for retirees: It has become increasingly difficult to find assets that generate a respectable stream of income.
Market Realist – Low rates have helped households. However, higher rates won’t necessarily be a bane.
The new home sales figure touched its seven-year high in May when 546,000 new homes were sold. As the graph above shows, new home (IYR) sales have risen over the last 12 months. Lower oil (USO) prices and ultra-low interest rates have aided consumers in buying new houses. Low gasoline prices mean that consumers have more to spend on other things.
Stocks (QQQ)(DIA) have given stellar returns over the last few years. The S&P 500 (IVV) has given a CAGR (compound annual growth rate) of ~20% since its lows in 2009. This has led to a massive wealth creation. Even considering the losses due to the financial crisis, the markets have created wealth in the last ten years.
However, the super-easy monetary policy has led to extremely low yields on Treasuries (TLT). Retirees usually don’t invest a lot of money in stocks, given that they don’t earn money anymore. This is why they can’t take excessive risk. Retirees have to accept the low yield provided by bonds. There are no or very few options, at best, that provide the sort of safety that investment-grade bonds can offer.
In the rest of the series, we’ll explore why higher interest rates aren’t as bad as you might think.