360° Coverage : OppenheimerFundsVoice: Interest Rates: Low For Long

2 Updates
OppenheimerFundsVoice: Interest Rates: Low For Long
Photo Credit: Forbes Business

OppenheimerFundsVoice: Interest Rates: Low For Long

Mar 27 2014, 10:17am CDT | by

Conventional wisdom in the investing world expects interest rates to rise over the next two to three years. Several pundits cite history and the slowly improving domestic economy as their evidence....

Filed under: news

 
 
 

26 weeks ago

OppenheimerFundsVoice: Interest Rates: Low For Long

Mar 27 2014, 10:17am CDT | by

Conventional wisdom in the investing world expects interest rates to rise over the next two to three years. Several pundits cite history and the slowly improving domestic economy as their evidence. However, that position ignores some very important reasons to believe interest rates could remain low for much longer than anticipated.

Low Rates Are a Global Phenomenon

Over the long term, interest rates are a function of economic growth and inflation. Historically, gross domestic product (GDP) and interest rates tend to track each other very closely. Since 2008, both developed and emerging economies have seen a slowdown relative to their trend growth rates prior to the financial crisis. With the exception of a few places like India or Brazil, global inflation is also quite low. In fact, in some countries, such as Japan and the United States, inflation is actually running below central bank expectations.

Economic growth trends and central bank policies in Europe and Japan both play key roles in the direction of interest rates. In aggregate, the Eurozone is the largest economy in the world, making it relevant to the direction of interest rates. It appears European nations have avoided a break up, but there are still significant issues that need to be addressed. Most importantly, flows continue to move from the weaker countries to the stronger countries. Given this backdrop, it is quite likely that central bank policy for the region will continue to be dictated by its weakest members.

The Japanese have outlined a three-pronged approach—dubbed “the three arrows”—to help address their current economic position. The first of the policies to be implemented was the large-scale asset purchases by the Bank of Japan (BOJ), which has been extremely successful, increasing the BOJ’s balance sheet substantially. The challenge for the BOJ will be to keep inflation from spiraling out of control while keeping the yen from depreciating too quickly.

China is currently grappling with its own structural issues. Most importantly, investment as a percentage of GDP is currently tracking at about 49%.1 This is much too high. For China to have a stable economy over the long term, it will be necessary for this to shrink and consumption as a percentage of GDP to grow. Policymakers in China understand this and are implementing policy actions to slow the economy and allow for consumption to grow over time. Unfortunately, for the rest of the world this means that global growth is likely to slow with China, and that has implications for a slowdown across the emerging world and in the commodity super cycle.

Sources: U.S. Bureau of Economic Analysis, Federal Reserve Bank, ISI Group, as of 6/30/13
Nominal GDP is smoothed over 10 years. Forecasts may not be achieved.  Past performance does not guarantee future results.

The Outlook for the U.S.

Our base case scenario right now is that growth in the U.S. will continue to be in the 1.5% – 2% range. This level of growth is below long-term trends, and in the near term we don’t see a major catalyst to break us out of this rut. Additionally, many people were counting on housing to be the driving force behind a strong recovery in the United States. Unfortunately, housing recoveries tend to have a small direct impact on GDP. With mortgage rates in the U.S. rising rather dramatically since the Fed began talk of a QE taper, we’ve already seen a slowdown in refinancing activity, and this will also increase the cost of housing to many potential buyers. The Fed has also stated that it will keep monetary policy accommodative until we reach a 6.5% unemployment level or breach a 2.5% level for inflation.

We don’t expect interest rates to rise anywhere until global GDP does. But we do believe this low interest rate environment has significant investment repercussions and makes some asset classes, including senior loans and master limited partnerships, particularly attractive.

Source of chart data: BLS, Barclays Live, Bloomberg, and Morgan Markets. The Barclays U.S. Aggregate Treasury Index represents public obligations of the U.S. Treasury with a remaining maturity of one year or more. The Barclays U.S. Aggregate Bond Index is an investment-grade domestic bond index. The Credit Suisse Leveraged Loan Index is an unmanaged index that tracks the performance of senior floating rate bank loans. The Barclays High Yield Bond Index represents the U.S. high yield debt market. The Barclays Aggregate Bond Index is an investment-grade domestic bond index. The indices shown are unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment.  Past performance does not guarantee future results.

Access the full Low Rates for a Long Time, and Preparing for the Eventual Rise white paper.

This story previously appeared on OppenheimerFunds.com.

1 Source: The World Bank 2/28/14. Fixed income investing entails credit risks and interest rate risks. When interest rates rise, bond prices generally fall, and a fund’s share prices can fall. Investments in below-investment-grade (“high yield” or “junk”) bonds are more at risk of default and are subject to liquidity risk. Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes and political and economic uncertainties. Emerging and developing market investments may be especially volatile. Diversification does not guarantee profit or protect against loss. Senior loans are typically lower rated and may be illiquid investments (which may not have a ready market). Investing in MLPs involves additional risks as compared to the risks of investing in common stock, including risks related to cash flow, dilution and voting rights. Each Fund’s investments are concentrated in the energy infrastructure industry with an emphasis on securities issued by MLPs, which may increase volatility. Energy infrastructure companies are subject to risks specific to the industry such as fluctuations in commodity prices, reduced volumes of natural gas or other energy commodities, environmental hazards, changes in the macroeconomic or the regulatory environment or extreme weather. MLPs may trade less frequently than larger companies due to their smaller capitalizations, which may result in erratic price movement or difficulty in buying or selling. Additional management fees and other expenses are associated with investing in MLP funds. The Oppenheimer SteelPath MLP Funds are subject to certain MLP tax risks. An investment in Oppenheimer SteelPath MLP Fund does not offer the same tax benefits as a direct investment in an MLP. The Funds are organized as subchapter “C” Corporations and are subject to U.S. federal income tax on taxable income at the corporate tax rate (currently as high as 35%) as well as state and local income taxes. The potential tax benefit of investing in MLPs depends on them being treated as partnerships for federal income tax purposes. If the MLP is deemed to be a corporation, its income would be subject to federal taxation at the entity level, reducing the amount of cash available for distribution, which could result in a reduction of the fund’s value. MLPs funds accrue deferred income taxes for future tax liabilities associated with a portion of MLP distributions considered to be a tax-deferred return of capital and for any net operating gains as well as capital appreciation of its investments. This deferred tax liability is reflected in the daily NAV and as a result a MLP fund’s after-tax performance could differ significantly from the underlying assets even if the pre-tax performance is closely tracked. These views represent the opinions of OppenheimerFunds and are not intended as investment advice or to predict or depict performance of any investment. These views are as of the open of business on March 21, 2014 and are subject to change based on subsequent developments. Carefully consider fund investment objectives, risks, charges and expenses. Visit oppenheimerfunds.com, call your advisor or 1.800.225.5677 (CALL-OPP) for a prospectus with this and other fund information. Read it carefully before investing. Oppenheimer funds are distributed by OppenheimerFunds Distributor, Inc. OppenheimerFunds Distributor, Inc. is not affiliated with Forbes.
© 2014 OppenheimerFunds Distributor, Inc. All rights reserved.

Source: Forbes Business

/>/>
 
Update
2

4 weeks ago

Khazanah throws MAS RM6b lifeline

Aug 29 2014 5:01pm CDT | Source: Business Times Singapore

August 30, 2014 1:15 AMKHAZANAH Nasional will inject RM6 billion (SS$2.4 billion) over three years to resuscitate loss-making Malaysia Airlines (MAS) under a recovery plan that includes even an Act of Parliament. Other key moves are migrating its operations, assets and liabilities to a new co ...
Source: Business Times Singapore   Full article at: Business Times Singapore
 

 
Update
1

4 weeks ago

MAS posts loss of RM307m for Q2

Aug 28 2014 5:00pm CDT | Source: Business Times Singapore

August 29, 2014 1:13 AMMALAYSIA Airlines (MAS) registered a loss of RM307 million (S$122 million) for the second quarter to end-June, but warned of worse to come in the second half when the "full financial impact of the double tragedies of MH370 and ...
Source: Business Times Singapore   Full article at: Business Times Singapore
 

 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

US sends 700 soldiers to Liberia to fight Ebola
Washington, Oct 2 (IANS) US Defence Secretary Chuck Hagel has authorised the deployment of 700 soldiers to Liberia to help with the fight against the Ebola epidemic there, the Defence Department said in a statement Wednesday.
 
 
US, India to collaborate on Mars, Earth missions
Washington, Oct 1 (IANS) US and India have agreed to enhance cooperation in Mars exploration and establish a pathway for future joint missions to explore the red planet besides launching a NASA-ISRO satellite mission to observe Earth.
 
 
Russell Crowe drives his real-life gladiators to brink of glory
Canberra, Oct 1 (IANS) Russell Crowe is one of Hollywood's biggest stars but his role this weekend as owner of Australian rugby league team South Sydney might be the most nerve-wracking of his career.
 
 
42 confirmed, suspected Ebola deaths in Congo
Kinshasa, Oct 1 (IANS) A total 42 people have died in confirmed or suspected Ebola infection cases in Democratic Republic of Congo (DRC), Minister of Public Health Felix Kabange said Wednesday.
 
 
 

Latest from the Network

Steven Tyler can't wait to be a grandfather again
Steven Tyler is ''over the moon'' that Liv Tyler is pregnant again. The Aerosmith rocker is delighted his eldest daughter, who already has son Milo, nine, with ex-husband Royston Langdon, and her boyfriend Dave Gardner...
Read more on Celebrity Balla
 
Lena Dunham felt 'ashamed' after date rape
Lena Dunham admits she ''spent so much time ashamed'' after being date raped at university. The 'Girls' creator and star, who is now in a long-term relationship with Fun.'s Jack Antonoff, says it took her a long time to...
Read more on Celebrity Balla
 
Kendall Jenner is infatuated with Chris Brown
Kendall Jenner is reportedly infatuated with Chris Brown. The 18-year-old model has fallen head-over-heels for the 'Loyal' hitmaker, 25, despite the fact he is still in a relationship with Karrueche Tran. A source close...
Read more on Celebrity Balla
 
Alyssa Milano quits 'Mistresses' for her kids
Alyssa Milano is quitting 'Mistresses' for the sake of her children. The 41-year-old actress, who has son Milo, three, and four-week-old daughter Elizabella with husband David Bugliari, has decided to leave the drama...
Read more on Celebrity Balla
 
Israel approves new settlement in East Jerusalem
Jerusalem, Oct 2 (IANS) An Israeli committee has granted approval to the construction of a massive Jewish settlement in East Jerusalem, Israeli settlements watchdog Peace Now said Wednesday. The approval by Jerusalem...
Read more on Politics Balla
 
Desmond Tutu urges support for Hong Kong protests
Johannesburg, Oct 1 (IANS/EFE) South African Nobel Peace laureate Desmond Tutu Wednesday called on all those who believe in democracy to support the student-led protests demanding that genuinely democratic elections be...
Read more on Politics Balla
 
Catalonia to go ahead with peaceful referendum
Madrid, Oct 1 (IANS) President of Spain's Catalonia autonomous community Artur Mas Wednesday said he has not changed his mind about the region's independence referendum despite the Spanish Constitutional Court...
Read more on Politics Balla
 
US, India to collaborate on Mars, Earth missions
Washington, Oct 1 (IANS) US and India have agreed to enhance cooperation in Mars exploration and establish a pathway for future joint missions to explore the red planet besides launching a NASA-ISRO satellite mission...
Read more on Business Balla
 
81 killed in Iraq as security forces launch offensive
Baghdad, Oct 1 (IANS) At least 81 people were killed Wednesday in airstrikes and clashes between the Iraqi forces and militants, security sources said. In Salahudin province, north of Baghdad, Iraqi security forces...
Read more on Politics Balla
 
Taylor Swift not thinking about dating
Taylor Swift insists dating is the ''last thing'' on her mind. The 24-year-old singer - who has previously been in relationships with Harry Styles, Joe Jonas, John Mayer and Jake Gyllenhaal - admits she isn't looking...
Read more on Celebrity Balla