With the NCAA tournament behind us, we thought we might take the opportunity to recap what was an eventful and quite historic month in the financial markets and what that means for us as investors.
On the 20th of March, the federal reserve decided to keep interest rates at 2.25-2.50% but went on to announced that they will not be raising rates for the rest of this year! This is mind boggling considering the fact that the fed was on course to raise rates. Let us visualize these rates:
Above is a chart of the federal funds rate. This is the rate that banks charge one another for lending money from their excess cash on an overnight basis. The question you are asking right now is how does this affect me? Essentially 11 years after the great financial crisis, the federal reserve is STILL encouraging individuals and institutions to borrow which has lead to record amounts of debt while savers are being punished with historically low interest rates. Let us know how much your interest accruing accounts are paying you.
The month of March saw an event that had finance junkies like myself fixated to their monitors. For the first time since 2007, the US Treasury yield curve inverted or depressed. Let us explain for your sake. A yield curve is literally a curve that shows an investor the rate of return he/she can expect across the length of time for lending money. Example of how a normal yield curve should look like:
Basically if you lend your money to an entity for 10 years you expect to be handsomely compensated with a higher interest rate than say if you had done so for 1 month because lending money for a longer period of time is riskier. Now this is how the US treasury yield curve looks like as of 12th April, 2019:
Notice the indentation in the middle. It’s quite strange innit? Not only does this not look normal, it is a foreshadowing of future expectations. Imagine you want to lend money to the US treasury. Now you as an investor are looking at this chart and thinking “If I lend them my money for 6 months, I’ll get a higher rate than if I lent to them for 7 years!” and you’d be right. You can capitalize off of this by purchasing short maturity bonds directly from the US treasury, your bank or an online broker such as TD Ameritrade or E-Trade but as an investor, do you want lower returns in the future for your investment?
THE CLEVER AFRICAN: INVEST IN YOU
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