Low Interest Rates a Boon for This Investment
Dividend Stocks Benefiting from Low Interest Rates
As yields on U.S. 10-year treasury bonds recover from record-lows, investors are looking for cues that will tell them whether this sell-off in bonds is a blip or solid turnaround after post-Brexit capital’s flight back to stock markets.
The 10-year yield climbed 19 basis points last week, the biggest increase since June 2015. The yield on this benchmark bond rose further today to 1.57%, its highest level in three weeks, recovering from uncertainty which clouded the interest-rate outlook globally after Britain voted to leave the European Union in a referendum last month.
However, this jump in bond yields may prove short-lived amid more calls for sluggish economic growth in the world’s largest economy and predictions for the Federal Reserve staying on the sidelines. Strategists at Morgan Stanley don’t see interest rates going up until 2018 as global growth, particularly in the U.S., will be disappointing over the next 12 months. The bank sees the U.S. economy expanding by 1.5% in 2017, while the consensus view is 2.3%. (Source: “No U.S. rate hike until 2018,” MarketWatch, July 18, 2016).
If the Fed decides to remain on the sidelines for an extended period of time, this policy has implications for interest rate-sensitive stocks such as financial services companies and those players with heavy debt-servicing costs. For example, the Bank of America Corp (NYSE:BAC), the second-largest U.S. bank in assets, showed a continued drag on its bottom line today due to a lower interest rate environment.
These developments, combined with U.S. stock markets hitting record levels every day, suggest that we’re in a long-run bull market for stocks. In this prolonged low rates environment, it will be a sound strategy for investors to look for yields in good dividend-paying stocks and avoid companies exposed to high debt levels.