So far, since the beginning of this year, the 10-year Treasury note yield has dropped below 1% creating a lowering of mortgage rates and loan rates in general. So that would be good, right? Well, if you are buying or refinancing a home or even getting a car loan this is good. But if you are attempting to find a good safe yield in a CD or Bond, you can put that on the back burner until who knows when.
As I have discussed before, the low rate policy engineered by the Federal Reserve Bank has created a scenario that is going to be difficult to rectify. You see, the US Government is running a 24 Trillion-dollar debt that we are paying interest towards continually. So we must keep these rates down so we can pay less interest to the bond holders and of course take on more debt. Because there is no yield in “safe” vehicles like CD’s or bonds, many are forced to look for income and yield from “riskier” investments like, dividend paying stocks, Real Estate Investment Trust, Alternative investments like equipment leasing or financing lawsuits against “evil “corporations.
Some of this stuff sounds far-fetched, but I get calls all the time from companies selling these “investments”. Many of these “investments” are legitimate, but may not have any liquidity to them, or in other words, you may not be able to sell and get your money out if you do not like the investment or need the money for something else.
Another way that these low interest rates are hurting the investor is not so obvious but I will explain it in the best way I can. Equity- indexed annuities have had a great place for a portion of someone’s investment portfolio that wanted guaranteed income or a place to potentially grow their money with no downside market risks. These annuities credit a portion of interest that is based on a growth in an index, most commonly S+P 500. But the insurance company is actually taking your premium and investing it in bonds, usually corporates. Then they buy an option contract on the underlying index to give you the potential market growth connected to the crediting strategy that you chose.
When interest rates get as low as they are, the yield from the corporate bonds to the insurance company is less than when rates are higher, which puts pressure on their operating margins, which in turn reduces the “caps” or potential upside they can provide to the investor. These Equity –indexed annuities can still be a super alternative for the right person with certain goals for that portion of their investments, they have just become leaner. Indexed annuities bought in the last few years may have a “Market Value adjustment” or MVA attached. If so, this could make your annuity more valuable because of the lower rates of today. If you have this feature with your current Indexed annuity, you should explore your options for taking advantage of this feature. Call my office if you want more info regarding these MVA’s!
