After North American central banks drove interest rates up in lockstep last year, one investment professional said interest rates are only now starting to normalize on a longer-term basis.
Gordon Reid, the president of Goodreid Investment Counsel, said that the low-interest environment that persisted for over a decade after the financial crisis of 2008 was an irregularity. According to the U.S. Federal Reserve, the American central bank changed the way it conducts monetary policy following the financial crisis of 2008, as it implemented a near-zero target range for the federal funds rate.
“Any of us that have a lot of gray hair know that five and six per cent [interest] rates are the norm, [and] historically have been the norm. The good news is that companies and individuals can operate quite effectively in that environment,” Reid said.
“The period that we had from 2008 to just a year or two ago was the anomaly, it wasn’t the norm.”
In its most recent interest rate decision in February, the Fed raised its benchmark rate by 25 basis points to a range of 4.5 per cent to 4.75 per cent. Before its most recent decision, the Fed raised rates seven times in 2022 starting in March of that year.
Reid said following the financial crisis of 2008, the U.S. government got involved with “sponsoring markets” and taking on the liabilities of corporations while expanding the Fed’s balance sheet in era of easy monetary and fiscal policy.
“A lot of money [was] going from the government to the hands of corporations and individuals,” he said adding that interest rates fell dramatically at the time.
Reid said he doesn’t think the Fed will lower interest rates this year, as it would only do so to ease the pressure on a potentially struggling economy.
“They’re [the Fed] not going to reduce interest rates, in my opinion, to ‘normalize rates,’” Reid said.
EFFECTS ON BONDS
Reid said that as interest rates have risen, bonds are now relevant again and are being incorporated into portfolios at Goodreid Investment Counsel. Amid volatility in equity markets, he said a lot of investors are opting to stay safe and allocate their money into the bond market.
“So we’re thankfully back more towards a normalized period after probably 10 or 12 years of very awkward markets I’d say for investors,” he said.
Today, the U.S. 10-year bond yield is around four per cent, according to Reid.
“So at Goodreid where we have 95 per cent or more of our clients in a balanced mandate, meaning that we have some fixed income, some U.S. and Canadian equities, the fixed income portion is becoming meaningful again,” Reid said.
However, Reid cautions against getting “too carried away,” with the resurgence of bonds, as higher inflation figures can erode investment gains.
“In a high inflationary environment, making four or five per cent on your money sounds good in absolute terms, but if inflation was six or seven [per cent] in real terms, you’re losing buying power,” he said.
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