When the Federal Reserve cut interest rates for the first time since 2008 last week, people were quick to point out how that was good news for consumers and companies looking to borrow money.
While lower rates are good news for anyone with debt, they are a curse for anyone needing to keep their money in cash.
“It’s a fantastic time for businesses to borrow for expansion since the long-term bond yield is crazy low. But low rates are a double-edged sword,” said Gene Dunford, corporate banking manager for Umpqua Bank.
Wall Street is now expecting even more rate cuts in the coming months. US-China trade tensions are high. Markets are volatile — US stocks tumbled again on Wednesday. Conservative investors may get squeezed even further.
Returns on cash and bonds are practically zero
The 10-Year US Treasury yield hit its lowest level in three years Wednesday, at just 1.62%, as President Donald Trump called for “bigger and faster” rate cuts from the Fed and central banks in India, New Zealand and Thailand all lowered rates.
And bond yields are negative in parts of Europe.
It’s an even more grim scenario for people who are parking their money in the bank. According to the latest figures from the FDIC, the average savings account pays a razor-thin yield of 0.09% while a money market account yields only 0.18%.
“There are a lot of problems for savers. If you have all your eggs in cash, then all else being equal that means lower rates and a lower return,” said Michael Reynolds, investment strategy officer at Glenmede Trust Company.
Reynolds said investors who are still looking for a steady income stream are probably now better off buying dividend-paying stocks, which should benefit if the Fed keeps cutting rates to stabilize the US economy and also provide higher yields than bonds.
“If people are worried about a trade war, there are places to hide. Utilities and real estate stocks pay big dividends and have a small portion of their business overseas,” Reynolds said.
Charlotte Geletka, managing partner with Silver Penny Financial Planning, also said that investors who want to save must broaden their horizons. Stocks may seem risky, but the alternative is putting your money in assets that will generate little, if any, return.
Scared investors flocking to safety
“We have a lot of clients with cash. Many of them still have PTSD from the 2008 and 2009 crisis. But we’re trying to urge people to add more risk,” Geletka said. “If you are trying to plan for retirement, you will need some growth. You can’t push everything into bonds and cash.”
That said, Geletka concedes that some risk-averse investors will be more inclined to look for bonds instead of stocks to generate income. She recommends municipal bonds as a way for savers to try and get some yield in their portfolio.
But even those yields are relatively low. So as long as investors are running scared and moving money to bonds and dividend-paying stocks, then there may be little opportunity for savers to generate a decent rate of return.
“Saving is a laudable goal but there is a torrent of money flocking to safety that is pushing yields down. So people are going to continue to be forced into higher risk investments,” said Tim Courtney, chief investment officer of Exencial Wealth Advisors.