What 2014’s Lower Interest Rates Mean for Investors

Doug Fabian

Doug Fabian is known for his expert knowledge of ETFs, bear funds and enhanced index funds to profit in any market climate.
Federal Reserve Building

If there is one thing that every investor should understand, it is that often the conventional wisdom on Wall Street just doesn’t play out. A prime example of this situation is the downtrend in interest rates so far in 2014.

Advertisement.

At the beginning of the year, the U.S. Federal Reserve began the much-talked about “taper” of quantitative easing, or QE. So far, the Fed has reduced its bond buying from $85 billion per month down to $55 billion per month. Conventional wisdom says that the reduction in bond buying from the Fed should have caused interest rates to rise. However, this just hasn’t happened yet.

As of this writing, the yield on the benchmark 10-Year Treasury Note is just above 2.7%. That metric is way down from the 2.99% level on Jan. 2. In percentage terms, that’s more than a 10% drop in yield — a move that’s left a lot of bond watchers scratching their heads in amazement.

So, why have rates been so low despite the Fed’s tapering?

Advertisement.

A recent editorial in the Wall Street Journal by E.S. Browning does a good job of shedding some light on the issue, offering up sound reasoning as to why.

TNX_040914

First off, the decline in interest rates this year is largely symptomatic of concerns about weak foreign economic growth, as well as sluggish economic data here at home. Tepid global and U.S. growth also has kept core inflation metrics below the Fed’s target of 2%. Yields are sensitive to inflation, and usually low inflation translates into low interest rates.

Exclusive  Three Ways Emotions Affect Traders

Second, there’s been strong demand for bonds this year, which Browning writes has come from institutions, pension funds and insurance companies that want to protect the stock market gains they’ve captured during the past couple of years. That likely has helped prompt a rotation away from equities and into bonds, and that demand has kept bond prices higher and bond yields down.

Advertisement.

A third reason is the Fed itself, which consistently has pledged to keep interest rates low despite the taper. During the past several years, the smart money really has learned that fighting the Fed is a futile effort, so the theory here is that as long as the Fed has pledged to keep rates in check, that’s what is likely to happen.

Finally, there’s the technical picture in bonds that continues to show interest rates remain under pressure. According to Asbury Research, a firm which tracks a series of technical indicators that have proven spot-on in terms of interest-rate trends, recent buying patterns of commercial futures traders; the action in U.S. Treasury bonds vs. German government bonds; and also surveys of trader attitudes all indicate lower rates on the horizon.

The bottom line here is that despite the Fed’s tapering, there are other, more important drivers operating in the bond market.

As an investor, the low-yield conundrum should be viewed as an opportunity to make big gains in sectors that benefit most from the current situation. Bonds, precious metals and especially emerging markets are some of best ways to take advantage of the trends we’ve witnessed in rates. That is precisely what we are investing in with my Successful Investing advisory service.

Exclusive  Three Ways Emotions Affect Traders

Advertisement.

Victory over Self

“I count him braver who overcomes his desires than him who conquers his enemies; for the hardest victory is over self.”

–Aristotle

The greatest of all philosophers knew that the self is often our worst enemy. And though it takes a lot of discipline and hard work, the more you can control your whims, the better person you are likely to be.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Making Money Alert readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Ask Doug.

Read my e-letter from last week about your Q1 ETF scorecard. I also invite you to comment about my column in the space provided below.

Advertisement.
share on:
share on:

PREMIUM SERVICES FOR INVESTORS

Dr. Mark Skousen

Named one of the "Top 20 Living Economists," Dr. Skousen is a professional economist, investment expert, university professor, and author of more than 25 books.

Product Details

  • Forecasts & Strategies
  • Home Run Trader
  • Fast Money Alert
  • Five Star Trader
  • TNT Trader
LEARN MORE HERE

Bryan Perry

A former Wall Street financial advisor with three decades' experience, Bryan Perry focuses his efforts on high-yield income investing and quick-hitting options plays.

Product Details

  • Cash Machine
  • Premium Income PRO (exclusively for subscribers of Cash Machine)
  • Quick Income Trader
  • Breakout Options Alert
  • Hi-Tech Trader
LEARN MORE HERE

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker,
financial journalist, and money manager. As well as a book author and regular contributor to
numerous investment websites, Jim is the editor of:

Product Details

  • Successful Investing
  • High Velocity Options
  • Intelligence Report
  • Bullseye Stock Trader
  • Eagle Eye Opener
LEARN MORE HERE

Bob Carlson

Bob Carlson provides independent, objective research covering all the financial issues of retirement and retirement planning. In addition, Bob serves as Chairman of the Board of Trustees of the Fairfax County (VA) Employees’ Retirement System, which has over $2.8 billion in assets.

Product Details

  • Retirement Watch
  • Retirement Watch Spotlight Series
  • Lifetime Retirement Protection Program
LEARN MORE HERE

Jon Johnson

Jon Johnson's philosophy in investing and trading is to take what the market gives you regardless if that is to the upside or downside. For the past 21 years, Jon has helped thousands of clients gain success in the financial markets through his newsletters and education services:

Product Details

  • Investment House Daily
  • Stock of the Week
  • Technical Traders Alert
  • Rapid Profits Stock Trader
LEARN MORE HERE

DividendInvestor.com

Used by financial advisors and individual investors all over the world, DividendInvestor.com is the premier provider and one-stop shop for dividend information and research.

Product Details

Popular tools include our proprietary Dividend Calendar, Dividend Calculator, Dividend Score Card, and many more.

  • Dividend Investor
LEARN MORE HERE

George Gilder

George Gilder is the most knowledgeable man in America when it comes to the future of technology and its impact on our lives.  He’s an established investor, bestselling author, and economist with an uncanny ability to foresee how new breakthroughs will play out, years in advance.

Product Details

  • Technology Report
  • Technology Report PRO
  • Moonshots
  • Private Reserve
  • Millionaire Circle
LEARN MORE HERE

DayTradeSPY

DayTradeSPY was founded by head trader Hugh Grossman, a retired internal auditor for a Fortune 500 company. After years of first-hand experience trying out one trading strategy after another, Hugh instead developed his own trading system centered around day trading SPY options. That’s it... Nothing else.

Product Details

  • Trading Room
  • Pick of the Day
  • Inner Circle
  • Online Workshops
LEARN MORE HERE