With the Fed projecting a low interest rate policy at least through 2014, that has done a few things. Primarily, it has allowed the long end of the yield curve to drop quite a bit, reducing borrowing costs for borrowers, corporations and governments alike. Conversely, it has wreaked havoc on projected pension returns and the portfolios of income investors. Here’s a summation of a few asset classes and financial avenues that either are or aren’t impacted much by this low-rate policy:
- Traditional Safe Investments – CDs, Savings Accounts and Money Markets have been crushed and will probably offer yields at lower than the inflation rate for years to come. This has had the intended effect of pushing investors further out into the risk spectrum.
- Bond Yields – You can’t help but notice the headlines on low bond yields driving down mortgage rates, but corporate bond yields are also pretty low as well. This begs the question as to how far into the junk spectrum investors should go chasing yield.
- Leverage – This low interest rate policy may have some unintended consequences. While it has made it less expensive to be a borrower, that in turn may have made it more attractive as well. We may end up with a new round of over-leveraged investors feasting on low rates.
Not So Much
- Dividend Paying Stocks – Because the market is not rallying and corporations have continued to increase their dividend payouts, many companies still offer attractive yields.
- Peer Lending – Peer lending platforms like Propser.com and Lending Club continue to offer attractive returns to investors capable of diversifying their loans and through proper due diligence, many investors are still reporting returns of 8% or higher even after accounting for defaults.
- Preferred Stocks – Even though there’s some solvency risk involved, preferreds (often times tied to Financials) still have decent yields in the 6-8% range.
- Short-Term Lending – Another class of financial instruments that seem to be little impacted by rates would be the short-term lending group. For instance, someone looking for payday loans in the UK may pay roughly the same rate today as they would have a year ago and 5 years ago. It seems to be a relatively insulated marketplace.