The market crash in 2008 had a profound affect that continues to this day. When it happened, central banks around the world lowered their interest rates drastically to encourage business investment and jump start their battered economies. That was to be expected. It was certainly not expected that they would stay stubbornly low for so long.
While economies were slowly recovering, there were small rate shifts— both up and down—but overall, we have seen historically low interest rates for the past decade.
There are several reasons why rates have remained persistently low:
- Worldwide economic growth has been inconsistent. The Canadian and U.S. recoveries have been steady, but slow, and much of the world has done worse. So central banks have been forced to keep rates low to help stimulate growth.
- Recent trade disputes, the Chinese slowdown, and uncertainty in Europe are further contributing to slower growth.
- An aging population is focusing more on saving, and reducing risk, which could also be pushing rates down.
- It benefits the U.S. to keep rates low because of their large federal debt.
Experts say there has been a paradigm shift1 and we should look at low rates as the new normal. But how low can they go?
What does the new normal mean for your investments?
- Fixed income will continue to play an important defensive role in your portfolio, but you need to be realistic about future returns.
- People holding cash in bank accounts get next to nothing in interest.
- Equities are cyclical and have performed above expectations for the past decade. With the potential of a recession on the horizon, this may not be an optimal time to shift assets toward equities.
- Low interest rates are pushing up housing prices, with potential bubbles happening in many major cities around the world, including here in Canada.
Where is the good news?
- Bond funds have seen increased returns because these funds hold higher yielding securities. CDSPI’s bond funds have done particularly well. They have seen an average return of 5.74% over the past year and they are all in the top quartile for five-year performance.2 CDSPI’s new Core Plus Bond Fund has been especially popular. It combines a base of high-quality bonds with plus strategies that include mortgages, high yield bonds, and emerging market debt for added return.
- There is also the opportunity to take advantage of historically low interest rates to refinance debts.
In today’s low-rate environment, you need to pay increased attention to your investment choices. Talk to an Investment Planning Advisor3 to discuss how CDSPI can help you navigate the low interest ecosystem.
1A Decade of Low Interest Rates is Changing Everything, BNN Bloomberg, July 2019
2As of September 30, 2019
3Advisory services are provided by licensed advisors at CDSPI Advisory Services Inc. Restrictions may apply to advisory services in certain jurisdictions.
Segregated funds are not guaranteed, their values change frequently and past performance may not be repeated.
The information contained in this article is of a general nature only and should not be considered as personal investment or financial advice. For specific advice about your situation, please consult with your financial advisor.
Any investment and economic outlook information contained in this article has been compiled by CDSPI from various sources. Information obtained from third parties is believed to be reliable, but no representation or warranty, express or implied, is made by CDSPI, its affiliates or any other person as to its accuracy, completeness or correctness. CDSPI and its affiliates assume no responsibility for any errors or omissions.