The global economy has experienced a low interest rate environment for several years, and the opportunities presented by such a climate will likely continue for the foreseeable future, as recent communications made by lawmakers worldwide point to the persistence of these low borrowing costs.
Fed monetary easing
Federal Reserve Chairman Ben Bernanke recently stated that after purchasing $3 trillion worth of debt-based securities, the central bank may choose to hold these financial instruments to maturity instead of selling them, according to Bloomberg.
Various industry participants have expressed concern that any substantial sale of these securities by the central bank could flood the market with bonds that might push interest rates sharply higher, the media outlet reports. It is important to note that the Fed is still buying $85 billion worth of assets every month, and has not specified when its stimulus plans will end.
ECB interest rate policy
The European Central Bank (ECB), which serves the European Union, cut its benchmark interest rate to a record low rate of 0.75 percent in July 2012 and has not changed it at the time of report, according to CNN Money. The financial institution has worked with nations in the region as the 17-country euro zone has struggled to overcome its fiscal challenges. Economic sentiment in the area has been bolstered amid the efforts of the ECB to help get countries back on track.
In addition to the moves that have been made by the ECB and the Federal Reserve, the Bank of England (BOE) has purchased 375 billion pounds worth of government bonds, the media outlet reports. Considering the size of the U.K. economy, this purchase represents a more aggressive stimulus than the one made by the Federal Reserve. Since the economy of the euro zone nation is still weak, many market participants have wondered if the BOE will engage in additional stimulus.
There are benefits that are generated by an environment of low interest rates, and there are also costs. The low borrowing costs undermine the returns generated by holding cash, as well as fixed-income securities such as bonds.
For example, if you hold money in a savings account that provides an annual percentage rate of 1.5 percent and inflation rises at a rate of 2 percent, you are actually losing money, since the amount of goods and services you can buy with the funds you have in savings is losing its purchasing power.
Alternatively, if you hold U.S. Treasuries that pay annual yields of 1.4 percent and inflation is 2 percent, you are once again losing money.
While such savings interest rates and bond yields may seem low, they have hit these levels recently as many investors flock to assets that they perceive as being safe havens.
One way you can take action to overcome the low returns on certain investments created in the existing environment of low interest rates is to put your money in to equities. Historically, stocks have yielded higher returns than other asset classes. Over time, equities have experienced appreciation far higher than those of bonds, which have been the favorite of many investors in the more than five years since the Great Recession.
Aside from picking out individual companies to invest in, there are many other ways you can be active in the stock market. You can invest in equities through the use of exchange-traded funds, mutual funds and other financial instruments. With so many options, education is crucial.
One good way to learn more about the various opportunities that exist is to visit TradingPub, which has significant stock trading education as well as many different people who are actively investing.