Managing wealth in an era of low interest rates
Markets are worried about the return of inflation and, in turn, higher interest rates. Unlike some, we believe low rates will remain a defining feature of markets in the years ahead. This has important implications when it comes to investing your wealth.
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As the world economy emerges from the Covid-19 crisis, financial markets are starting to get anxious. For most of the past year, investors had been reassured by central banks’ support, which included cutting interest rates to near zero and massive purchases of government bonds. Everything changed with the successful roll-out of vaccinations and Joe Biden’s stimulus plans. The stage was set for a strong economic rebound and the withdrawal of firefighting monetary policy measures.
This is where we are today. As with any sudden change in an established market trend, this one caused significant tremors. Bond yields – the measure of the income they pay relative to their price – have risen sharply. Expectations of higher inflation are now causing some concern. Could central banks change their stance much sooner than expected? Could the almost unthinkable happen, and interest rates rise?
Take a step back, however, and this year’s rise in bond yields looks like little more than a blip in an incredible 40-year grind lower. Even after its recent moves, the 10-year US government bond – a key benchmark for financial markets – yields just 1.7%. A decade ago, as the world recovered from the financial crisis of 2008, US yields were twice that. Before the crisis, they were often closer to 6% and at the beginning of my working career they were yielding almost 10%.
This doesn’t yet look like the end of a trend
10-Year treasury yield over the last 40 years
Source: Federal Reserve Bank of St. Louis
Interest rates on deposits, which follow central bank’s interest rate decisions, remain at rock-bottom levels. “The economy is a long way from our goals, and it is likely to take some time for substantial further progress to be achieved,” said Jerome Powell, Chairman of the Federal Reserve, in April 2021. With US unemployment still above 6% – compared to 3.5% before the pandemic hit – there is a way to go before the US central bank even starts thinking about raising interest rates. It’s a similar story at major central banks in other developed markets, such as the UK and Germany.
Lingering concern about Covid-19 also ensures strong demand for safe havens like government bonds, helping to keep yields low.
While there is scope for yields to rise modestly from current levels, we think a number of longer-term factors will keep interest rates and bond yields anchored at low levels. These factors existed before the pandemic – and appear set to continue.
Five themes for a low interest rate world
This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.
This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.
All data contained within this document is sourced from Cazenove Capital unless otherwise stated.
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