Fed Funds Rates

Low Interest Rates: An Opportunity or a Challenge?

September 28, 2020

Ted HansonBy Ted Hanson
Securities Analyst

 
Whether you are a borrower or a saver, interest rates play a role in a variety of decisions Americans make every day. Last week my colleague Mike Moreland discussed the expectations that the Federal Reserve will keep short-term interest rates ‘lower for longer’. The question now is, do lower rates help or hurt the American consumer? The answer depends on which side of the coin you are on – borrower or saver.

 

Great Opportunities for Borrowers

For those looking to borrow money, a low interest rate environment is positive news. Borrowing costs on loans are decreasing across a variety of sectors, especially notable in the mortgage sector. Housing demand continues to be one of the few bright spots in the economy this year. Mortgage rates fell to historically low levels, which increased demand for refinancing and new mortgage applications. With the expectation that Treasury yields will remain low for some time, mortgage rates are likely to follow suit. However, lending criteria has begun to tighten recently, allowing borrowers with good credit to benefit the most. If you are interested in taking advantage of the low interest rates, contact our mortgage team today.

30-Year Mortgage Rate vs. 10-Year Treasury Yield

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Small Challenges for Savers

An extended low interest rate environment will provide challenges for many Americans, especially those looking to save or invest. Those dependent on a steady income stream will find it harder to maintain that income stream with conservative investments the longer interest rates remain low. In addition, cash will not provide a noticeably positive return.

Not only is the yield on high quality U.S. bonds falling, the risk is rising. As the below chart provided by J.P. Morgan shows, the duration of the investment grade U.S. bond market is rising while the yield continues to fall. Duration is the measure of the sensitivity in bond prices to a change in interest rates — the larger the duration the more the price will fall if interest rates rise and vice versa.

Chart:

This combination may push some to reach further out on the risk spectrum in efforts to maintain their income stream. Others may reconsider retirement and other life events. Either way, big life decisions will become even more difficult without the necessary income stream.

Where do you fall? 

Overall, a low interest rate environment will create a new conversation for many. Some may find the current environment is suitable for their needs to borrow money. Millions of Americans have already taken advantage of historic low mortgage rates, purchasing new homes or refinancing their current mortgages. Others will experience challenges. Many may delay retirement or other life events that require a more stable income stream. These are only a few of the many factors Americans will have to take into account. Talk to one of our financial professionals today to ensure your portfolio structures are consistent with the goals you want to achieve.

About the Author

Ted Hanson

Ted Hanson is a Securities Analyst within the Wealth Management Division at Security National Bank. As a securities analyst, he manages client portfolios, analyzes securities and performs daily trading activities. Ted is a graduate from Morningside College with a degree in finance and accounting.