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Smart Thought Of The Week: 2%

A couple of economists reckon that the US Federal Reserve could start tapering, which in layman’s terms is a gradual withdrawal of monetary stimulus, a lot sooner than investors expect. They think that 10-year Treasury yields could approach 2% by the end of 2021.

That would be a near doubling of the risk-free rate of return, which is currently around 1.1%.

The pair of economists said: “If you give people money, they are going to find a way to spend it”. They added that although the US economy lost steam towards the end of 2020, the “negative momentum” will reverse by February.

They also think the US economy will get another fiscal boost of “a trillion on top of a trillion”, given that the Democrats will soon not only control the Lower House, but the Senate and The White House, too.

The fact that the Fed cannot continue to print money willy-nilly is a given. The fact that people will spend the money that they are given is also a given. But whether the yield on 10-year Treasuries will rise is far from assured….

…. and even if they did, those yields are unlikely to be significantly higher. For what is it’s worth, 2% might feel about right to some observers. But it is unlikely to be much more than that. The last thing that the US economy needs is an even bigger interest-rate millstone around its neck.

A rise in interest rates, albeit slight, could be a godsend for some investors who have been reluctant buyers of shares. It could provide them with another option for income, even though that income could be lower than with dividends. It could even precipitate another bout of “taper tantrum”.

For some savers, a risk-free rate of 2% could be appealing. But for serious income investors, it won’t be nearly enough, if we do the ….

…. The 10-year Treasury yield would need to quadruple from where it is now to be anywhere comparable to a portfolio of shares that yields 3% and growing it payout at a rate of 10% a year.

Let’s not forget that if interest should rise, it is probably because the global economy is improving. And that could be good for shares.

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Disclosure: David Kuo does not own shares in any of the companies mentioned.