Election Results Bring Opportunities for Savers
The recent election results have created a window of opportunity for retirees and other savers who have set aside some money. With the Republican Party gaining control of the White House and the Senate, and potentially the House of Representatives, interest rates on 10-year Treasury notes have surged towards last year’s highs.
Inflation-Protected Bonds Reach Highest Levels Since 2008
The interest rates on inflation-protected U.S. government bonds are nearing the highest levels seen since the global financial crisis in 2008. This presents an attractive low-risk savings opportunity for those seeking security and income rather than volatile growth from stocks.
Savers Can Capitalize on Rising Interest Rates
Savers can take advantage of these rising interest rates by buying these bonds directly at many brokerage firms or through mutual funds or exchange-traded funds. While there is a risk that interest rates could continue to rise, they have already shown a significant improvement from pre-election levels.
Market Reaction to Election Results
The interest rate on the 10-year Treasury note jumped by 0.2 percentage points to 4.44% following the election results, while the rate on inflation-protected TIPS bonds rose to 2.25%, a four-month high. Long-term interest rates have risen as the market digests the budgetary and economic implications of the election sweep.
Impact on Government Borrowing
If the government needs to borrow more money, it is expected to drive up the cost of borrowing, with the government paying a higher rate of interest to attract the necessary funds. This could lead to a wholesale renewal of tax cuts and additional deficits, adding pressure on interest rates.
Modern Monetary Theory: A Possible Solution?
One possible solution to financing the deficits could be the adoption of modern monetary theory, which involves printing the money needed to finance the deficits. This would require the president to exert more direct control over the Federal Reserve.
Not Everyone Benefits from Higher Interest Rates
While higher interest rates on U.S. Treasury bonds may be beneficial for some, they are bad news for those who already have their money invested in bonds. The higher interest rate will also drive up the amount of tax money spent servicing the debt, which is already the second-biggest item in the federal budget.
Protecting Against Inflation
Those worried about the impact of inflation on their long-term bonds may be better advised to hold inflation-protected TIPS bonds, whose annual interest payments are effectively adjusted to reflect changes in the consumer-price index.
Ordinary Americans Hold Significant Bond Holdings
According to data from the Investment Company Institute, ordinary Americans hold an estimated $5.1 trillion in bond mutual funds and exchange-traded funds, plus another $1.7 trillion in hybrid stock-and-bond funds.
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