Now that Disney+ is streaming the musical, Hamilton, there is once again a lot of talk about this unique theatrical production. I don’t consider myself a history buff, but I do enjoy stories that bring history to life with real characters – Hamilton is one of those stories for me.
A few years back, Emily (my wife) and I celebrated our 5th anniversary in New York City. We wanted to see Hamilton but could not justify the $800 per person ticket as I consider us “fair weather” theater fans. We were eating dinner at a restaurant near the theater district (back when that was normal), and I happened to look at StubHub during dinner. Tickets had dropped to $400, but we still thought that was too pricey for us. I looked again as we were finishing our dinner, and the tickets had dropped again and were less than $260 a piece!
I then proceeded to do one of the wilder things that I have done in my adult life – we purchased the tickets on my phone, had the restaurant print the tickets (Richard Rodgers Theatre still only accepts paper tickets), and ran through Time Square while it was snowing, barely making in time for the opening number! It is still one of my favorite memories with Emily.
In a similar fashion, the fixed income market has fond memories of higher interest rates. A lot of clients remember the “good ‘ol days” when our short term bond ladders were yielding 3% to 6%. Interest rates have been low for quite some time when compared to history. Randy loves to tell the story about the first condo he purchased in Houston back in the 80’s when he got a 10% interest rate and it was a great deal – times sure have changed.
Below are a few of the most common questions we get from clients and friends about interest rates:
Q: Are you worried about negative interest rates here in the U.S. like we have seen in other parts of the world?
A: Our short answer is no – we are not worried and do not expect rates to go negative. Since the U.S. dollar is the world’s reserve currency, it would be much harder to see interest rates stay negative for a prolonged period. With that being said, anything is possible.
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Q: Don’t interest rates have to go up from here?
A: In theory, yes. However, we do not think interest rates will move higher any time soon. The Federal Reserve has said that they plan to keep short term interest rates (think your checking/savings account interest) near zero for the next few years. While the market controls medium term interest rates (i.e. 10 year) and also the long term interest rates (i.e. 30 year), we do not see these rates rising until the economy is back to 100% capacity.
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Q: If interest rates are close to zero, how do I invest with my non-stock money?
A: This is a great question and a hard one to answer. The Federal Reserve has forced (or encouraged) investors to buy more stocks. With that being said, there are still certain fixed income solutions that are producing income with more attractive yields. For example, floating rate bonds, corporate bonds, and mortgage bonds are still are paying higher interest rates when compared to the low yields at your local bank.
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Q: What factors would move interest rates higher?
A: The Federal Reserve is trying to stimulate the economy via a number of “tools” and would love to create some inflation. If that strategy is successful, and the economy comes roaring back, we could see the 10-year Treasury bond back over 1%. This would be a big move, but interest rates would still be at historic lows. Higher interest would mean that the economy is performing well.
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Q: Is your team still comfortable with municipal tax-free bonds?
A: Yes – we still really like tax-free bonds on a selective basis. If Harris County, the City of Houston, or the State of Texas stop paying their interest payments, there will be anarchy in the streets. It will not matter at that point whether you own bonds or stocks. By the way, it is not legal for any state to file for bankruptcy under current law.
The bottom line is this… regardless of the interest rate environment, retirement is all about income. You need an income-oriented investment process that is designed to generate reoccurring (and hopefully increasing income) to help meet your retirement needs.
About the Author
Matt Price serves as a Partner and Senior Vice President for The Price Group of Steward Partners. He resides in Houston with his wife, Emily, their two daughters and the family golden retriever. Matt studied at the University of Pennsylvania – Wharton School of Business for his Certified Investment Management Analyst (CIMA®) designation after receiving his undergraduate degree from the University of Tennessee - Knoxville. Over the past 10 years, Matt has helped families make high quality, common sense decisions regarding their wealth and their legacy. Matt firmly believes that everyone needs a wealth coach!
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The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author, and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise. Income from municipal bonds is not subject to federal income taxation; however, it may be subject to state and local taxes and, for certain investors, to the alternative minimum tax. Income from taxable municipal bonds is subject to federal income taxation, and it may be subject to state and local taxes. Municipal securities typically provide a lower yield than comparably rated taxable investments in consideration of their tax-advantaged status. Investments in municipal securities may not be appropriate for all investors, particularly those who do not stand to benefit from the tax status of the investment. Please consult an income tax professional to assess the impact of holding such securities on your tax liability.