September 30, 2020


FINANCIAL PLANNING: Considerations for a Low Interest Rate Environment



Interest rates in the U.S. are currently hovering near historic lows in an effort to stimulate economic activity. For reference, the yield on a 1-year Treasury bill is approximately 0.12% and the yield on a 10-year Treasury bond is approximately 0.66% as of September 29th, 2020. A weekly survey of institutions by shows the average interest rates on savings accounts was 0.09% for the week of September 23rd, 2020.

Further, officials at the Federal Reserve have committed to keeping rates highly accommodative until we are deep into an economic recovery. The Federal Open Market Committee released a forecast in mid-September that called for the Fed Funds Rate to stay near zero through 2023. With that in mind, investors should plan for a low rate environment that could last for at least the next few years.



The current rate environment presents some fantastic opportunities for borrowers. Mortgage refinance activity has been very high in recent months given the attractiveness of low mortgage rates. Mortgage borrowers should explore their refinance options, even if they refinanced recently. Borrowers with higher mortgage balances stand to benefit the most from decreases in mortgage rates, even if they are subtle. Several lenders are currently advertising mortgage rates under 3.00% for a variety of different terms.

For example, refinancing a 30-year $300,000 mortgage from 4.00% to 3.00% will save a borrower approximately $60,276 in interest expense over the life of the loan.

Refinance opportunities are not limited to mortgagors. Borrowers with student loans, auto loans, or other personal debt should ensure that their current borrowing package is the best fit for them.



Investors who are still working should take time to review their workplace retirement plan and explore any opportunities within a stable value fund. This is especially true for conservative investors with a significant portion of their overall portfolio allocated to cash or bonds. It is not unusual to find a stable value fund offering a significantly higher yield than typical investment grade bond investments. In particular, many 403(b) plans offer stable value funds with yields at 3.00% or higher, which is attractive when compared to other conservative investment options.



Investors accustomed to receiving attractive yields on their fixed income investments should lower their expectations for yield for the foreseeable future. High grade intermediate corporate bonds that previously offered yields in the 3% – 4% range will likely now yield closer to 1% for a comparable maturity. While these low rates may not last forever, it is prudent to expect very modest returns from conservative investments and adjust any near-term financial planning considerations accordingly.



Savers will be hard pressed to find any sort of meaningful return on their cash balances, but attractive loyalty and rewards programs may offer some compensation. Credit card reward programs can further enhance the value of working with a particular financial institution. Whether in the form of points, travel miles, or cash rewards, savers should consider the most valuable rewards for their particular situation and ensure that their bank relationship is a good fit for them.

Some banks offer reduced fees for a variety of services for certain clients. Fees for safe deposit boxes, transactions, wire transfers, and other services may be had for little to no cost with the right bank relationship, helping offset the sting of low interest rates.