Question

Consider this opinion: "Interest rates have been generally declining for the past 30 years, and are near historical lows in the U.S. Therefore, there is nowhere for interest rates to go but up, which means you'd have to be nuts to invest in bonds!" What do you think?

Answer 1

I do not agree with this statement because I think that interest rates in general has been subsequently lower right now because it has been done in accordance with the monetary policy by the Federal Reserve to counter the the recession in the economy and they are trying to inflate the demand and decrease the interest rate by helping the demand to stimulate.

These declining interest rate will also be signalling that this is a phase of of unexpected impending recession and the central bank has lowered the interest rate in order to prevent that impending recession So, an investor who is bullish on the economy will be trying to invest into the bonds which will be long-term bonds and they have a higher probability of returning a higher rate of return if the economy started to pick up and stabilize so these bonds will be generating higher rate of return than equity class if there is a a stability in the economy but uncertainty on the financial front so one should be looking to invest into these bonds if he does not want high risk and these bonds will be helping the investor in order to gain in the long run through uniform payment of interest and risk coverage and also because they are less risky than stocks.

So, it can be summarised that interest rate will be stabilizing once the economy starts to pick up and one should be bullish on the economy because it is showing prospect of recovery.