Lower Rates
Last month Fed officials lowered interest rates by 0.5%, a substantial reduction from their two-decade high. The committee’s logic was that such a reduction would maintain solid economic growth and initial indications verify that logic. Since that move, the investment topic du jour is how quickly more cuts will come. However, the interest rates that most consumers face have already fallen by a large margin. A year ago, the 30-year fixed mortgage was 8.28%. Today it stands at 6.83%. Five-year ARMs are approaching 5.5% and the 10-year treasury sits at 3.75%, down 1.25% over the last year. For financial advisors like us, that presents two scenarios for our clients.
First, it’s time to examine rates on any loans outstanding. Rates on mortgages, credit cards, and personal loans have fallen, and refinancing them should be examined. In addition, floating-rate loans should be considered as more rate cuts are likely. Second, we locked in longer-term debt for some clients that needed fixed-income exposure a year ago and those bonds have increased in value given their inversion to rates. There is some nice capital gain built into long bonds that have been held for a year or more that may be worthy of profit-taking.
The Fed rate cut last month was a seismic shift in policy and should not go unnoticed. Interest rates dictate investment allocation at our firm as we always seek the most return with the least risk. At 3.75%, bonds don’t deserve much investment consideration. As advisors, we recognize the opportunity to address the liabilities on a personal balance sheet. Take advantage of lower rates while you can.
As always, I appreciate your continued trust and confidence.
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