Interest rates have been very low for years. But meaningful changes are occurring.
The 2 year US Treasury note yield increased from 1.20% at the end of December, 2016 to over 2% last week. On a relative basis, that is a huge increase.
According to the Wall Street Journal, this is the first time the 2 year Treasury note has been above 2% since 2008.
This means that you should no longer be satisfied with having significant money in the bank earning .01% or some ridiculously low interest rate close to zero.
You can now earn interest on short term bonds or certificates of deposits that should be somewhat meaningful to you.
Importantly, you should make sure that you do not have significant cash that is not earning interest, or hardly any interest, such as in a bank checking or savings account.
If you have money in an account that is earning nothing or next to nothing, you should contact us to discuss whether we can help you to earn more on this money.
Money market fund returns, or accounts where you have immediate access to your money, are still very low. However, we can provide you with alternatives that offer liquidity within a few days on conservative fixed income investments.
Sometimes small numbers, even 2%, can have a material impact. For example, if you have $200,000 earning nothing, you could gain thousand of dollars of interest income per year.
Give us a call and let’s talk.
The general consensus is that the Federal Reserve will increase short term interest rates 3-4 times this year, .25% at a time. This would likely mean that short term rates will be .75% to 1.00% higher a year from now.
The yield curve is flattening, meaning the difference between short term rates and long term interest rates is decreasing. Currently, the 2 year US Treasury Note yields around 2%, whereas the 10 year US Treasury Note yields 2.55%, a premium of 0.55% for the longer maturity. We do not know if this will continue, but for today, it means that if you are a borrower, we would still recommend keeping a mortgage and generally not pre-paying your mortgage payments.
If you are in the market for a new house or mortgage, we still consider mortgage rates to be very low historically. We feel that taking a mortgage today at these rates will prove to be an excellent financial decision for the long term.
The tax law that was enacted at the end of 2017 did make some changes to home related borrowing. Home equity loan interest is no longer deductible for 2018 and beyond, even if the loan was obtained prior to the law. If you are considering borrowing money for home renovations, a car purchase or other reasons, we would still recommend considering a home equity loan, as the interest rate may be better than other loans. We also recommend you to have a home equity loan, if you do not have adequate emergency cash reserves, just to be prepared.
Further, the new law limited mortgage interest deductibility to interest on the first $750,000 of a mortgage loan. Depending on your personal circumstances, we may still advise you to borrow more than $750,000 on a mortgage, as rates are historically low.
This week’s takeaway: Financial advice must be given based on the current environment and the factors involved never remain constant. That’s why you should talk with us before you make financial moves, as interest rates and tax laws are always changing.