Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Investing in a Low Interest Rate Market

Stock-Markets / Investing 2012 Apr 03, 2012 - 02:13 PM GMT

By: Investment_U

Stock-Markets

Jason Jenkins writes: For the last year, the effective federal funds interest rate has been 0.25%. The federal funds rate is considered one of the most important interest rates in the U.S. markets.

The federal funds rate is used to control the supply of available funds and hence, inflation and other interest rates. Raising the rate makes it more expensive to borrow. That lowers the supply of available money, which increases the short-term interest rates and helps keep inflation in check. Lowering the rate has the opposite effect, bringing short-term interest rates down.


In this incredibly low interest rate environment, there are some investments you’ll probably want to avoid, as well as some better choices for where to invest.

Long-Term CDs or Bonds Aren’t the Way

The average one-year CD is around 0.34%. If you go with a longer-term five-year CD, you may get 1.14%. We know rates are locked for the next few years, but the one-year is nowhere near inflation. With the rate so close to zero, buying a long-term CD locks in long-term to really low rates. Nobody wants to find himself in that predicament.

One thing taught in college finance 101 is that bonds have a strong inverse link to interest rates. That is, when market interest rates increase, the prices of existing bond issues decrease. In addition, the longer it is to the bond’s maturity, the more sensitive its price is to changes in the market interest rate. The longer you’re exposed to the market, the more risk you take on.

Equities and Short-Term Bonds…

Low rates are loved by the markets – look at the way they react to any hint of quantitative easing. In theory, if you can borrow money at lower rates, you’re more willing to be a player and grow. Hopefully this action translates into earnings and a rising stock price.

As Investment U bond expert Steve McDonald preaches, short-term bonds work because they’re much less sensitive to changes in rates. Better yet, if you hold it to maturity, the bond’s price becomes less important because you get back the principal. Due to its nature, short-term bond rates aren’t that high, but a modest return still beats one that causes you to lose spending power.

The Interesting Twist

The Fed, as I mentioned before, intends to keep money artificially cheap – keep low rates so that it’ll be easier for people to borrow money, invest it in expensive things of lasting value that require long-term financing, and keep your fingers crossed that this will be a catalyst for a stronger recovery.

But it hasn’t worked out that way. Unemployment hovers at historic highs, so it’s hard to take advantage of these rates when you’re not sure about your income. This isn’t so much of an issue of liquidity but one of confidence.

Despite the uncertainties involved, equities remain one of the better choices if you like other fundamental indicators in the economy. They give a chance to benefit from low interest rates, and generally aren’t expected to decline sharply when interest rates rise.

Good investing,

Source: http://www.investmentu.com/2012/April/low-interest-rate-market.html

by Jason Jenkins, Investment U Research

http://www.investmentu.com

Copyright © 1999 - 2012 by The Oxford Club, L.L.C All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Investment U, Attn: Member Services , 105 West Monument Street, Baltimore, MD 21201 Email: CustomerService@InvestmentU.com

Disclaimer: Investment U Disclaimer: Nothing published by Investment U should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Investment U should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Investment U Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in