When Will Rates Go Up

Posted on Friday, September 25, 2020 in Financial Education

Erik NiliusNominal Treasury yields have fallen to historic lows and real yields are negative. In this low rate environment, investors will continue to hunt for yield. While the downturn has caused high yield spreads to widen, defaults are likely to rise, so careful security selection is critical. Additionally, high-quality fixed income will continue to play an important role in providing investors with diversification and protection if the recession should deepen.

The FOMC maintained the federal funds target rate at a range of 0.00%–0.25%. The Committee will also maintain its current pace of asset purchases of $80 billion per month. It also further clarified conditions for adjusting policy rates relating to its new average inflation-targeting framework:

1) inflation would need to run moderately above 2% for a period of time to compensate for periods of low inflation, and

2) longer-term inflation expectations would need to remain anchored at 2%. This means allowing inflation to run above 2% to make up for past shortfalls, leaving rates close to zero for even longer than expected.

This has led to many questions about higher yields. In this “lower for longer” environment, it is worth discussing risk and allocation, as there are many alternative investments to explore. As we navigate the years ahead, we want to make sure our clients hold high-quality investments that work to meet their specific goals. The days of 4-5% CD’s are gone for now. This new “normal” will require more thought and planning as we seek to find yield for those who need it.

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