Sep 24, 2020
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How To Make Money When Interest Rates Are Low

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You can hardly make any money on interest anymore. Why are rates of interest so low? And what can we do about it? The ever-wise Lewis J. Walker a strategist at Capital Insight Group in Peachtree Corners Ga. has some answers: As reported in The Wall Street Journal on July 1 the yield on the benchmark 10-year U


S. Treasury note hit the lowest level ever at 1. 385%. We emphasize the word ever to underscore the astounding undeniable fact that the yield on 10-year government paper has never been so low dating back to February 1790. Per the Journal in 1790 America began to accumulate debt to assist pay Revolutionary War costs


Why is the 10-year Treasury yield so important? The Federal Reserve Bank sets short term interests rates known as the federal funds rate. The current fed funds target rate is 0. 25%-0. 50%. This is the rate of interest applicable when one depository bank lends funds held on the Federal Reserve to a different bank overnight


This rate affects monetary and monetary conditions. This is widely watched as a signal of Fed intentions easy money versus tight money with impacts on GDP growth employment and inflation. The fed funds rate is one in all our central bank s levers whereas the 10-year Treasury rate is influenced largely by market demand for Treasury paper coming from bond buyers worldwide the so-called bond vigilantes


Whenever there is a flight to safety consisting of in the course of the two-day Brexit market exit buying pressure pushes bond prices up and yields down in inverse fashion. The 10-year Treasury note rate has substantial influence on mortgage rates. The all time peak for the 10-year Treasury rate was 15


82% in September 1981 as then-Fed Chairman Paul Volcker pushed the fed funds rate to 20% to throttle inflation rates from the Jimmy Carter years. The prime lending rate for ordinary borrowers soared to 21. 5% in December 1980 when compared with 3. 50% today. Older investors remember fondly getting high rates of interest on savings in 1981


However it was a financial chimera. The inflation rate in 1980 was 13. 5% when compared with core inflation today of 2. 2%. The top federal marginal tax rate was 70% versus 39. 6% today. For a pair filing jointly in 1981 a 54% rate kicked in at $60 000 of taxable income reminiscent of $158 572 in 2016


For a single filer $30 000 or $79 286 in today s dollars. Hey up-and-comers how would you like to lose 54 cents of every marginal dollar earned to the federal tax man? You’ll feel the Bern. PROMOTED Civic Nation BRANDVOICE | Paid Program
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Generally you were behind the curve. Today with inflation at 2. 2% after taxes you continue to are. Brexit caused a flight to the united states dollar pushing down yields on federal paper while strengthening the dollar. The theory is that Britain s surprising decision would spur foreign central banks to create more easy money while restraining the united states Fed from pushing up our interest rates


A too strong dollar pressures U. S. exporters as goods sold in dollars are expensive when compared with goods and services sold in weaker currencies. Expect rates of interest to stay historically low for some time. That s good for borrowers including home and vehicle buyers if you will qualify for a loan


The Journal reported 15-year fixed mortgages at 2. 77%. Essentially that s free money adjusted for inflation and taxation. Homeowners check your current rate. A cost-free mortgage refinancing could put dollars in your pocket. Savers will continue to shop for safe money yields. For the week ending July 1 the typical bank money market yield was 0


27%. That s ridiculous and a lot of mainstream banks pay less that that! See bankrate. com. You could find FDIC-guaranteed rates at 1. 00% and better. As an investor you could do better within the search for cash flow if you’re willing to simply accept non-guarantees and a few degree of volatility


Your advisor may help explain the trade-offs between safety and yield. Dividend yields on well-selected value oriented stocks can range from 2%-3%. Yields on certain real estate plays offer the opportunity of good yields and an inflation hedge and often times tax shelter from depreciation. We live in a nervous low-yield world


Yin and yang offers challenges and opportunities. Understanding the tradeoffs is integral to financial success

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