Advisors continue to wrestle with the question about what to do with clients conservatively invested in an era of ultra-low interest rates. Many expected interest rates to begin rising this year. But the U.S. economy contracted in the first quarter, investors flocked to the safety of bonds driving up prices, yields have stayed low. Bond portfolios continue to yield relatively low rates of return.
Investors are now faced with a tough choice: Stay in bonds and suffer the combined effects of inflation and low yields or get into risky assets in the hope a recovery is finally on the horizon. These are tough calls. “Capital preservation is what everyone is worried about. I understand that urge to preserve capital, but you also have to make some money so that you don’t run out,” says Dean Owen, a Saskatchewan-based advisor. “But that’s tough when clients are staying out of risky assets.”
The debate over the direction of rates in the year ahead continues to play out in capilal markets. If there is a consensus emerging among experts it seems to be that rates will be “lower for longer.” Well-known popular Toronto-based economist David Rosenberg weighed in on the bond debate this week, suggesting that while rates may rise some in the years ahead, the increases will be limited. “The way I see it, we are into a new secular bear market on U.S. Treasury securities," writes Rosenberg. "This does not mean we can't revisit 2% again….but…we are unlikely to come anywhere close to prior yield peaks (over 5% in 2007, over 6% in 2000)."
This prediction is in line with former Fed head Ben Bernanke who has reportedly, privately, "shared the expectation that overnight rates would not reach their long-range level of 4% in his lifetime.”