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Why Interest Rates Should Interest You

Drew Barnes, CFP®
September 9, 2019

Always a hot topic across the investment landscape, interest rates remain in focus as we move through the second half of the year.

Interest rates affect the decisions you make with money in many ways, some more obvious than others. For consumers, interest rates affect the payment amounts for consumer loans (ie. mortgages, home equity lines of credit, auto loans, student loans, credit cards, etc).  This has a direct impact on the size of the loan that the consumer may qualify for and the amount of their monthly payments.

For entrepreneurs and bankers, interest rates affect forecasts for future profitability. For instance, it's easy to enter the capital markets and finance a new project when interest rates are at historic lows, but the same project might not be a money maker long term if expected interest payments double. This, in turn, affects which products and services are offered in the economy, which jobs become available and how investments are structured.

Watching the Trends

Last year we experienced steady increases in interest rates through the first three quarters of the year, both in short term interest rates controlled by the Federal Reserve (via the Federal Funds Rate) and in longer term rates (i.e. 10-year Treasury yield), controlled by the market.

The fourth quarter then came with elevated volatility and stock market declines, leading long-term interest rates to reverse course.

Let’s take a look at how interest rates have changed over the course of the last year and address some of the news that made headlines.

1. Federal Funds Rate

  • 2.25% (up from 2.00% a year ago)
  • The Fed hasn’t raised interest rates since December 2018
  • The Fed cut their benchmark interest rate from 2.50% to 2.25% at their July meeting. This is their first interest rate cut since 2008.


2. 10-Year Treasury Bond

  • Currently at 1.46% (down from 2.88% a year ago)
  • The 10-year treasury yield started 2019 at 2.66%, meaning it is down over 1% so far in 2019.  This has led to solid price appreciation for bonds.  As a reminder, as interest rates decrease, the price of bonds increase.
  • The 10-year yield got as high as 3.24% on Nov. 8, 2018, and has sharply decreased since.

3. Mortgage Rates

  • Current 30 year fixed-rate conventional mortgages are at 3.73% (down from 4.40% a year ago).
  • Declining interest rates are good for consumer debt. Mortgages are loosely tied to the 10-year Treasury yield, and as a result, have fallen to the lowest levels since November 2016.
  • Declining rates also incentivize refinancing and purchases of new homes which is good for economic activity.  Consumers can afford “more home” at lower rates.

Inverted Yield Curve

There has been a lot of news this year about portions of the yield curve becoming inverted. The yield curve refers to a graph that plots where interest rates stand at a point in time at different maturities (i.e., the current rate of a 90-day T-Bill relative to a 2-year treasury bond, a 5-year treasury bond, a 10-year Treasury bond, a 30-year Treasury bond, etc.).

An inverted yield curve means that shorter-term interest rates are higher than longer-term interest rates. Typically (in a normal yield curve), investors demand higher interest for longer maturity bonds due to the added uncertainty of needing to be paid back over a longer period.

Some consider an inverted yield curve to be a warning sign that a recession is on the way. While we don’t dismiss the inverted yield curve, the current inversion isn’t a major concern of ours at this point. The labor market remains very strong (unemployment was at 3.7% in July, job openings are near all-time highs), and consumer confidence remains very high. Though we’re speaking about interest rates, historical statistics show that it is a bullish sign for the stock market when the gap between the 10-year Treasury yield and consumer confidence are at these current levels.

Can We Talk?

If you’re feeling concerned about what you’re reading in the headlines and what it might mean for your investment portfolio, let us know. We welcome the opportunity to discuss your individual financial goals and how to best stay on track to meet them.

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Any opinions are those of M.J. Smith & Associates and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.

Raymond James Financial Services, Inc. and your Raymond James Financial Advisor do not solicit or offer residential mortgage products and are unable to accept any residential mortgage loan applications or to offer or negotiate terms of any such loan. You will be referred to a qualified Bank Consultant for your residential mortgage lending needs.

U.S. government bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government.

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