Profiting in a Low Interest Rate Environment

Australian interest rates

This morning the Reserve Bank of Australia (RBA) released the minutes of their 5 September Monetary Policy Meeting. Various members of the RBA discussed topics ranging from employment to wage growth and housing activity, and what these could mean for interest rates going forward.

Income investors, those that just want an adequate yield on their investment, are praying for the day bond yields rise again. Bonds are usually seen as the best set and forget investment. Because AAA government bonds are considered ‘risk free’, all you have to do is buy into a satisfactory yield and collect your income.

Current Bond Yields

But of course, current bond yields are far from satisfactory. The yield on an Australian 10-year government bond is around 2.75%. On a 10-year US bond the yield is even lower, around 2.25%.

The RBA members noted that:

Long-term government bond yields in the major financial markets had generally declined over the preceding month.

‘…US Treasury bond yields had reached the lowest level since the US election, in part reflecting continued uncertainty about the implementation of the administration’s policy agenda and lower-than-expected inflation data.

‘…The yield on Australian 10-year government bonds had changed little over the preceding month. The spread of Australian 10-year government bonds to US Treasuries had widened over recent months, which was also the case for spreads to US Treasuries of a number of other sovereign bonds.

Future Economic Growth

But the RBA continues to feel upbeat about future growth. As reported by The Australian:

The Reserve Bank of Australia remains upbeat on the growth outlook, sensing the economy is moving into a new phase as it shrugs off a lengthy mining investment downturn, while job market conditions also improve.

Yet I suspect climbing household debt and low wage growth will stunt economic growth moving forward.

As stated by the RBA’s minutes, ‘Growth in wages and inflation had remained low but stable. This was expected to remain the case for some time.’ If this happens, spending will continue to remain subdued and the RBA wont risk pushing higher interest rate payments onto households already drowning in debt.

But there’s a way to profit from low interest rates. Find out more by clicking here.

Regards,

Härje Ronngard,

Junior Analyst, Markets & Money

Härje Ronngard

Härje Ronngard

Harje Ronngard is a Junior Analyst at Markets and Money.

With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation.  

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